Nursery Chains 2022: Overview - Gaining ground

Aplethora of transactions have taken place in the past 12 months, with multiple growth across the sector from small to large acquisitions. New buyers have entered, regional groups have expanded and private-equity investments have fuelled appetite in the marketplace.

But despite signs of recovery for many nursery groups, owners are still facing daily operational challenges over staffing, particularly with Covid-related absences.

CHILDCARE MARKET

On a positive note, the investment outlook for the childcare market has rebounded to pre-pandemic levels.

Property specialist Christie & Co reports that the past year saw a ‘tsunami of interest’ from prospective buyers, with childcare and education business transactions rising by 21 per cent from 2020 to 2021, a 5 per cent increase on 2019.

LaingBuisson’s report on the childcare market predicted that growth of multiples would slightly cool down in 2020 and 2021. ‘But what’s happened with nursery valuations over the past 15 months or so has confounded our expectations of two years ago,’ says Arun Kanwar, partner at consultancy Cairneagle Associates.

Although the market is largely being driven by chains, there are two distinct groups that they fall into: the traditional longstanding chains and the new consolidators. The new private equity-backed chains, in particular, are driving the market, mainly using the ‘buy-and-build’ strategy, whereby they purchase a business with a view to making more acquisitions in the same sector.

Examples include Kids Planet, which has doubled to nearly 100 nurseries; The Old Station, which has gone from 32 to 52; Family First, which started with four nurseries and now has 47; and Welcome Nurseries, which has grown from 28 to 48 in 12 months.

Sale-and-leaseback, whereby providers release capital to invest in expansion, is having a resurgence, with chains such as Just Childcare selling the freeholds of 23 of its 62 nurseries to real estate investment trust LXi REIT, last September.

In the first few months of 2022 alone, the pace has not abated. Old Station Nursery group, part of La Maison Bleue, snapped up a chain of eight nurseries, and Kids Planet grew to 97 settings.

But despite the optimism, Courteney Donaldson, managing director of childcare and education at Christie & Co, says some nurseries have weathered the impact of the pandemic relatively well and others are still struggling – with occupancy levels, financial issues, and staff shortages.

‘There remains a mixed picture across the UK,’ she says. ‘Some nurseries in city centres continue to experience occupancy challenges and others in suburban areas are citing full business recovery.

‘We expect to see more closures on the horizon, further consolidation and the emergence of a two-tier market.’

VALUE PERSPECTIVE

Since the start of the year, Christie & Co has seen a surge in owners of single-asset settings forging ahead with the sale of their businesses. Many owners who were forced to postpone their retirement plans due to the pandemic have decided to press ahead with exit plans in 2022.

Despite the rise in nursery closures last year, due to extra pressures created by the pandemic, only a small proportion – 6 per cent – of Christie & Co’s sales were ‘distressed’, whereby a sale process is accelerated in a bid to avoid insolvency or receivership.

However, Donaldson predicts that figure could rise this year.

‘Nurseries that are leasehold have had rental moratoriums, meaning that in the event of rent arrears, landlords have not been able to take action. But these benefits will fall away on 25 March.

‘Furlough income also ended last September, thus another Covid financial crutch has been lost. Many nurseries are in mortgaged premises. If nurseries haven’t recovered in occupancy terms, and debt serviceability is at risk, the banks will start asking more questions.’

RECRUITMENT CRISIS

Since September, Flying Start Nurseries in Cornwall has had a ‘boom’ in custom. According to director of childcare Sophia Rose, there has been an increase in new starters and the number of hours children are attending has increased.

However, despite being ‘phenomenally busy’, Rose says she has had to cap the number of children attending because ‘we just don’t have the staff.

‘We’ve retained our staff, but the recruitment crisis is such a challenge in Cornwall that we are offering qualified staff a £200 golden handshake when joining. I put up a recruitment post in a small town recently and there were 12 other adverts for settings looking to recruit early years staff.’

Since the pandemic, Flying Start has closed two underperforming settings in the more deprived areas of Saltash and Helston.

Rose says, ‘We’ve taken on an after-school club at a school because of the demand for after-school care. And overall, we’ve gone from six to four settings. However, we are looking at the possibility of opening more settings that are purpose-built because we believe they last longer and are more marketable for parents.

‘Any decision is a big decision and until the recruitment improves, we can’t open anywhere else.’

GOVERNMENT SUPPORT

Family-run Atherton House has launched a new recruitment arm, Caterpillar Careers, in response to the sector’s staffing crisis.

George Apel, managing director, says, ‘One of the difficulties the sector faces is that they can’t put signs up on the doors drawing attention to the fact they need more staff. So, we’ve employed a dedicated, in-house recruitment consultant to help us fill our permanent and agency staff vacancies.’

The group acquired its fifth setting in the North West in August with funding from Santander UK.

‘One of our main goals this year is stability. We would like to acquire more settings, but this is strongly reliant on the success of our recruitment company and the Government prioritising the sector. Without being safe in the knowledge that we can recruit the practitioners necessary to provide the level of care our families expect, we’d be hesitant to expand,’ Apel says.

Despite being in the private sector, his chain is ‘profoundly influenced’ by the national minimum wage and early years funding rates.

‘If the former continues to increase at a significantly higher rate than the latter, then the sector could reach breaking point,’ he adds.

OCCUPANCY CHALLENGES

Between 1 April 2020 and 31 March 2021, there was a net loss of 442 nurseries and pre-schools in England, the majority of which were in deprived areas.

A survey of 60 providers by Cairneagle in December found that 40 per cent of operators said they had already recovered; just over 10 per cent thought they would recover in the first quarter of this year; a third said they would recover between April and June; a little over 5 per cent thought they would recover in the second half of this year; and 5 per cent said they would take until 2023 to recover.

Kanwar explains, ‘Group operators are on average doing better than single sites, partly because they’ve focused strategically on catchments where there are dual-income working professionals who’ve weathered the economic challenges of Covid better, and partly because they have invested in recovering their enrolment through CRM [customer relationship management] and inquiry conversion, and can invest in mitigating staff recruitment and retention issues.

‘Regional differences are also apparent and we’re seeing more challenges in places like Yorkshire and the Humber and parts of the South West in terms of enrolment.’

GROUP BENEFITS

Andrew Clifford, chief operating officer of CC Nurseries Group, which operates across southern England and Scotland, says being part of a group with a wider central team has enabled it to support the ups and downs and deal with changing guidance and additional support for staff, particularly in terms of mental health.

He says, ‘We have been able to co-ordinate and provide support across different settings, where guidance allowed. However, like the majority of settings, we face the same challenges in terms of Covid absences and disruption.’

Despite the challenges, the group purchased its tenth setting in Barnet, north London in December, and two more are due to open in Scotland this year, along with plans to develop an early years and residential care facility with its umbrella organisation, Care Concern.

Clifford says, ‘Our nurseries in Scotland have seen a strong rebound from the 2020 and partial January 2021 lockdowns and the second half of 2021 has been very strong.’

However, Cary Rankin, CEO of Thrive Childcare and Education, which runs 38 nurseries across Scotland and the North West, says there are advantages of being single site or a smaller group in terms of the ability to be agile and make and mobilise plans quickly, which was needed through the pandemic.

As chief executive of Thrive, formerly the Bertram Nursery Group, Rankin had to make some difficult decisions. The group, which had 42 nurseries listed in Nursery Chains 2019, closed six settings, but has since started growing again with the acquisition of Smarties Nursery in Chester last March.

He says, ‘It can be harder to maintain control over a multi-site operation. Communication needs to travel through more layers of management and more employees. So when delivering a plan for recovery, mobilising new operational plans or briefing out ever-changing guidance, it can be more difficult.

‘We looked at our estate and made a number of difficult yet essential decisions to close a number of sites, permanently. This included relocating or amalgamating nursery settings where possible; exercising lease breaks or opportunities where we could renegotiate leases; or full closure.’

FAILING BUSINESSES

Ofsted’s report on ‘how multiple providers work’ found that some chains are working closely with local authorities to ensure there is provision in more deprived areas.

Rankin says he has spoken to many single-site providers that have bought stressed or failed businesses and made them work, and who are now looking to exit with good businesses.

He says, ‘As long as you have the know-how and you are prepared to carry the costs, and be patient for the returns, then this high-risk model could yield some positive results.’

However, Thrive has made the decision to not look at stressed assets or turnaround settings.

Rankin says, ‘Where there is an exceptionally high level of funded places over private, your income can be restricted due to the fixed funding rates you receive. The costs of operating a nursery continue to increase due to higher costs of National Living Wage, utility bills, consumables, rent and rates. Your profits get squeezed. Again, economies of scale may provide larger groups with cost-saving opportunities to mitigate this squeeze, but essentially this can be a lot of work for little return, and for a private business reliant on profits – which is not a dirty word – it becomes less attractive.

‘We want to focus our efforts and deploy our resources to support the needs of the current estate and integrating new sites that we know are already running a great business and we can learn from.’

Donaldson says social enterprise businesses are currently more likely to expand in deprived areas as they offset the profits from nurseries in more affluent areas. However, she says, ‘A number of national groups in England that have settings in deprived areas found their funded children were the slowest to return in September 2020 after lockdown.’

Christie & Co predicts that 2022 could see the emergence of a two-tier childcare market.

‘There is likely to be short supply of nursery places in some areas – not just deprived areas – because we are hearing anecdotally from a number of providers that they have been downgraded by Ofsted during their latest inspections and potentially this could impact supply and further closures,’ explains Donaldson.

INSPECTION PROCESS

Following a recent Ofsted report exploring the roles and responsibilities of nursery groups in England, Ofsted is calling for greater oversight of multiple providers.

Sarah Mackenzie, chief strategy officer at N Family Club, says, ‘I can certainly see some merit in doing this. There are a number of things that are consistent across our nurseries: our curriculum; our pedagogical approach; our Academy offer; our policies and procedures; our systems and our approach to recruitment, which could be covered once, maybe annually. The nursery inspection would then focus on how that policy was being implemented in practice, rather than what the approach was.’

She adds, ‘I think reviewing these at a group level and then looking at how an individual nursery implements that group approach and the impact it has on their children, families and team would be a better use of time and resources and create more insightful feedback. I also think seeing patterns and trends across a group, whether this be consistent areas of strength, or challenges that keep coming up, would be beneficial.’

COUNTRY-WIDE SHIFT

There has been a shift in demand for acquisitions from London and the South East to other regions, such as the Midlands, in the past year, according to Kanwar.

Kids Planet, the Old Station Nursery group, Family First and N Family Club have all made significant acquisitions in the Midlands recently.

‘Operators are starting to look outside London and the Home Counties more as prices have heated up there so much. Central London has been slightly less desirable for some investors post-Covid because of changing work patterns and because people have moved to other areas of the UK,’ says Kanwar.

OakNorth Bank is continuing to fund the growth of small-scale operators across the UK. In the pipeline is a chain of three nurseries in the North of England, one of which features a new swimming pool on-site.

Ben Barbanel, head of debt finance at OakNorth Bank, says, ‘It’s a slightly different model to the norm, in that the setting offers full daycare alongside drop-in childcare for parents when they swim. The rationale behind this is that the site is multi-use and has another revenue stream. The owner wants to carry on rolling out more new sites with this model in mind.’

Barbanel expects to see a move towards more purpose-built accommodation, which may, in theory, be easier to clean and look after.

‘Converting old spaces can be costly, and some settings are looking at future-proofing. For example, one new-build that we are funding has been built as two storeys, but it’s got the foundations to add another two stories as and when needed,’ Barbanel explains.

POSITIVE OUTLOOK

‘The market is more active than we’ve ever seen it,’ says Kanwar. ‘The overall M&A [mergers and acquisitions] market – not just childcare – is incredibly busy, mainly [because] so much capital has been raised that needs to be deployed, and debt is still cheap. Within the overall market, education and nurseries are proving especially desirable.’

With private, voluntary and independent providers making up around 80 per cent of the marketplace, ‘with the top two players owning 2 to 3 per cent of the market share each, there is still a lot of growth left in the marketplace’, Kanwar explains, along with ‘substantial opportunities for consolidation’.

Despite the challenges of the past two years, Rankin remains optimistic and excited about the year ahead. ‘Our decision to reduce the operation by six nurseries strengthened our foundations and provided confidence to key stakeholders. Thankfully, our transaction timetable is on schedule and our private equity sponsors, and the bank, have been very supportive, given that we could demonstrate the business was in good shape relative to the operating landscape.’

He is confident that Thrive is on track to achieve its double-digit growth plan per annum. However, he comments, ‘Growth cannot be at any cost. It is subject to assessing the impact of any returning pandemic restrictions.’

As for how the rest of this year will look, Donaldson says, ‘It’s a transient time. Those businesses that have recovered will continue to thrive. But we expect to see more closures on the horizon along with further consolidation.

‘Buyer demand will remain high and, overall, it’s a positive outlook and it feels like we are coming to the end of this slightly bleak Omicron wave.’

CASE STUDY: N Family Club

N Family Club has grown from six nurseries to 17 in the past 12 months – and plans to expand to 80 nurseries within the next three years.

Its latest openings, both in converted schools, took place in December and January, in Balham and Angel, London. The group also expanded into the West Midlands in November, with the acquisition of Bright Minds Daycare, a group of four nurseries, taking the total number of childcare places up to 1,588.

This spring, doors open to two new nurseries in London: Highgate, on the site of a former bank; and Whetstone, part of a new residential development.

Sarah Mackenzie, chief strategy officer, says, ‘We went into 2021 with a clear expansion plan: to acquire nurseries that fit our criteria across a range of factors – location, size of the building and outside space.’

N Family Club, founded in 2017, is privately funded and the expansion to date has predominantly come through private investment and Gravis, an infrastructure bank that focuses on social infrastructure assets.

Sustainable building design and construction features strongly in the chain’s portfolio.

The Twickenham nursery, for example, was a former church which is now divided into smaller spaces with two mezzanines. N Family Brixton, a former care home, features two historic buildings connected by a two-storey linked full-height glazed building.

The move to increasing levels of hybrid working and the change in premise law has also seen N Family creating nurseries out of former offices, as with the Tunbridge Wells nursery, and focusing on opportunities within commuter towns such as Cobham and Weybridge. The London Fields nursery is co-located alongside a co-working space that supports hybrid working in that location.

The group is also interested in buildings which are being built as part of new developments, creating new communities and regenerating areas.

Mackenzie says, ‘We saw great success in this approach with our Olympic Park nursery and we’ll be replicating this in our upcoming launch at Whetstone.’