YES
Dr Antonia Simon
Associate Professor at Social Research Institute, UCL
Research I led examining the reach and impact of private sector childcare in England identified a change in the provision landscape, with smaller settings being replaced by larger providers or chains, through a process of ‘acquisitions and mergers’. This growth is being funded by a finance model which prioritises profit-making by borrowing money or ‘leveraging finance’ (which gambles on profits being greater than the interest payable).
Private equity is argued to offer advantages, such as competition to meet consumer demand while keeping costs down, because companies that fail to do so are driven out of business by competition. However, this argument may be weak to make in childcare, when evidence finds this process is not leading to an increase in childcare places.
There are also ethical concerns about the long-term viability of private equity finance in childcare. It has been argued, for example, that the operating ethos means these companies do not seek to distribute profits for the good of society and they aim to minimise tax paid to governments.
It has been shown both in childcare and in adult social services that private equity companies operate with huge losses, are often in debt to their investors, and have low to no financial reserves. These features mean they are at higher risk of closure than companies with alternative finance models. These closures often happen at short notice if the parent company needs to pay back financial investors quickly. In these cases, families will lose their places, and are not guaranteed to find replacement ones. For example, ABC Learning in Australia, which was one of Australia’s largest childcare providers, collapsed overnight during the global financial crisis of 2008, leaving many families without places (and staff without jobs).
Despite such anecdotal evidence that this type of provider is more at risk of closure, there is currently not enough direct evidence of this link. Ofsted could address the data gap by collecting information on type and size of provider through its registration process. There are undoubtedly financial pressures being placed on nurseries, and providers have rightly argued that government subsidies do not cover the actual cost of providing a place. However, there is enough evidence about the risks associated with private equity to raise concerns about provision collapse, and to argue for public money to only go to companies with proof they are robust enough to withstand those risks.
NO
Leah Turner
Co-Founder of Owen Froebel – Offering Day Nursery Brokerage, Valuations and Sales
Private equity is often characterised as a cash grab, unscrupulous investors capitalising on their latest market to line their pockets. However, there are a number of positives that private equity brings to a market which can be advantageous for the sector and its stakeholders as much as for investors.
Capital infusion – private equity brings significant financial resources to a sector, which not only provides funds for acquisition (which is a benefit to nursery owners), but also for starting and expanding existing nurseries in a quality environment, a current example being N Family Club.
Quality and operational improvement – not often discussed is that a lot of private equity firms have incentives to invest in sectors, such as healthcare, where they can demonstrate strong corporate social responsibility. Many funds are structured to demonstrate a proportion of their investments meet certain community criteria and how investment will improve quality. Accordingly, they often bring in personnel from outside the sector who have transferable skills that can benefit the wider sector, e.g., some of the training academies that a lot of the bigger groups have set up.
Innovation and technology – most private equity investors seek to run businesses to scale, and with this often economies of scale are introduced which have ripple effects across the sector. Likewise, these innovations bring technologies and systems which then become accessible to other smaller providers in the sector. You only have to look at the choices in nursery software that are now available and the simple yet massive time saver that products like Funding Loop offer.
Professionalisation – this is not to question the professionalism of anyone working in the sector, but one of the sector’s challenges is in providing long-term career paths for excellent practitioners. A path that stopped at nursery manager unless they operated their own setting, but corporates need people in operational management at a higher level, recruitment, compliance, etc. An example is in the dental sector where, since consolidation, a lot of senior operations roles are filled by former dental nurses.
Exit values – it would be remiss of me not to mention that for nursery owners looking to exit, it is private equity investors that drive market pricing, even for smaller nurseries, as the fraught competition for bigger settings where they outbid each other ripple down the market.