Market view – a buoyant outlook

We are now firmly entering a period of global economic challenge, with supply chains continuing to be constrained, staffing challenges at all levels, energy insecurity, inflation, the Ukraine war and a worsening economic outlook. Debt is becoming more difficult, which is in turn slowing down mergers and acquisitions activity.

Yet against this backdrop, ‘small group’ acquisitions in the nursery market in the UK have remained extremely buoyant and 2022 prices for sellers have been holding up at the incredible 2021 levels. In the past few weeks, we have seen material acquisitions by Bright Stars (previously ICP), Family First and Kids Planet, among others.

We have two key observations. The first is that we are seeing buyers being more open-minded to maintain their growth ambitions in the face of a competitive market, and finding ‘hidden gem’ opportunities where they or others haven’t done so previously. For example, we have seen one operator making a play in Scotland and another has recently entered the North East – in both cases, there hasn’t been all that much consolidation in these regions in the past. Another operator is evaluating acquisitions with value potential they feel that they are uniquely positioned to unlock – taking the nurseries from ‘average’ to ‘star’ performers.

The second observation is that there will be some inevitable slowdown as we enter a ‘darkening’ economic period. We have seen appetite for, or value of, some of the larger nursery businesses already softening, and this will have an inevitable domino effect on their ability to buy expensively (they need to maintain multiple arbitrage) and the need for them to be selective. This means that sellers will need to temper their expectations a bit.

This is an inevitable ‘part of the cycle’ and we remain confident about the importance of and outlook of the childcare sector. It’s our firm view that the sector will remain investable and active both over this period of uncertainty and in the longer term.