Thile 2024 represented a period of stability, the sector can now look forward to a renewed push of activity. NW speaks to the experts to unpick the trends.
Arun Kanwar, managing partner at Cairneagle
We’ve seen pretty good stability over the last year, and capacity increasing. This is likely because there is an improving set of conditions allowing nurseries to build for the future, so the margins are starting to improve, which creates a more attractive environment to invest in the sector.
Demand has started to be stimulated by the expanded funding offer, and rates for the under-threes are good, which is helping people to recover some of their lost margins, and the recruitment and retention crisis isn’t as bad as it was.
That said, the uptick in demand isn’t uniform. We’re seeing more demand in areas of middle and lower income, because higher-income areas benefit less from the funding offer due to eligibility.
The reality has been that mergers and acquisitions (M&As) have slowed down in the last year. There haven’t been that many blockbuster transactions. Sellers need to have realistic expectations, given that interest rates are higher, the cost of debt is higher, and therefore the burden of proof is higher too.
A lot of groups have used 2024 as a year of stabilisation. They have been worrying about their existing portfolios, or making the most of the funded offer, and continuing to work on turnaround from what has been a really difficult three or four years. What we expect is that now, we will see more M&A activity. We are starting to see that market rebound already, and lots of groups are gearing up for more significant M&As in 2025.
It’s good that the new Government has reaffirmed the commitment to funded hours, but with more funding in the system, and more than half coming from government, there will be increased scrutiny of how providers charge for extras. So people are cautious, because the reality is that governments don’t always properly understand the challenges that operators face.
Leah Turner, co-founder of Owen Froebel
It was no surprise how many closures there were in 2023. But certainly in the latter half of 2024, the funding has been a real relief to so many people that 2025 should be a much better year. The worst has passed for most. There’s a positivity we haven’t seen since pre-Covid.
Investment will continue, groups like Kids Planet are still very much in a growth stage, and that’s expected to carry on for at least another couple of years before they go through their next cycle of funding. Over time, they will expand what they will consider.
But there’s still so much stock out there, the sky’s the limit. They are joined by more new investors, private-equity-backed purchasers, and new entrants looking to grow a group from scratch.
The myth that the big groups buy everything is just that, a myth. The vast majority of purchases are micro-consolidators; people who have one, two or three settings and are looking to buy more. That’s really where banks are throwing their weight around. Over the next year, we will see more of these micro-consolidators taking the next step to become a medium-sized group, and this is where the slightly larger settings are in a great position. Whereas previously they may have been too big for an individual buyer and too small for the larger groups, there is now more buyer growth in the middle, and that impacts values.
Although we don’t know what it will look like yet, the new Ofsted report card is much needed. From a buyer’s viewpoint, it makes for a clearer situation. A bank won’t see a grading as an arbitrary title and refuse to lend on it, because there are more shades of grey. You can see where settings are improving, which will help experienced business buyers see what requires a business solution rather than an industry-specific solution.
Courteney Donaldson, managing director of childcare and education at Christie & Co
2024 was a very interesting year that saw a fair amount of change. We had fewer closures than in 2023. The closures we did see were largely in the 30 per cent most-deprived wards in England, where parents were predominantly accessing their core entitlements and not buying additional hours.
We saw fewer owners coming to the market to sell in the first quarter, as many were waiting to see what the first phase of the extended entitlement would bring. But, from April, we saw increased demand from parents, and that massively gathered pace in September when the scheme came into full effect.
Some providers have seen quite a transformation in their operations because of increases in demand, occupancy and funding rates for two-year-olds. It had been anticipated that the market resettlement and slight economic shift, including the settling of inflation, would have lessened closures in the year ahead. However, National Insurance contribution increases and salary changes teamed with changes to employment laws could very well fuel closures in 2025.
The benefits of the expanded offer have been seen across the board, but vary from authority to authority depending on how much the rates increase by, how much of that rate is passed on, and the local authority’s guidance regarding consumables. It’s something that buyers consider.
We’re still seeing a really high volume of leasehold transactions, about 80 per cent of sales. It’s a shift away from ten years ago, when 80 per cent of transactions were companies with freehold assets. That is because of the price differential for purchasers, and because owners who want to retire can generate a rental income if they retain their freehold.
Since Covid, but really coming to the fore this year, it has become clear that although buyers are happy to pay significant premiums for the right businesses, they are becoming increasingly considered. Owners often fail to appreciate the degree of due diligence a buyer will undertake. All the regulatory areas could be ticked, but some business matters might not be in hand. People often lift the bonnet on their business before they prepare for sale, but there’s real value in taking that breathing space at the start of every new year to revisit your business plan with a fresh pair of eyes.
Andrew Steen, managing director of Redwoods Dowling Kerr
Rates of nursery closures increased in 2023 and steadied in 2024. But just as providers thought wage growth was settling down, and they repriced accordingly, some more wage growth issues could affect the sector in the next few years.
The outlook for 2025 will see the double whammy of employers’ NI contributions rising to 15 per cent and the threshold reducing from £9,100 to £5,000 impacting small and medium-sized nurseries. This, combined with the increase in the National Living Wage, will impact nurseries and require fee increases.
Single settings remain a sizeable percentage of the market. That percentage is reducing, but I suspect more slowly in 2024, as there weren’t as many large group sales. But corporate growth will continue to be driven by the fact that interest rates have settled. The economics of ‘UK plc’ improved during the summer; inflation is now back to a more reasonable level (albeit with upwards pressure) and corporates have ambitious growth plans. There’s still significant demand for nurseries both in the UK and internationally.
We have an ageing childcare ownership model, and that, more than anything, will fuel M&A activity in the next few years. The introduction of pensions into inheritance tax could lead people to start spending the money earlier, rather than leaving it, and some people may decide they wish to exit earlier than they originally planned.
If you take the expanded funding, the fall in interest rates and the fact that wage growth had stabilised, all together these factors bring stability to nurseries’ figures, which in turn creates confidence for acquisitions.
Our pipelines are showing a company record in terms of volumes of units for deals that are already agreed for the first quarter of 2025. As often happens, the sector got a bit of a shock, and then took some time to think about it. Things settle down, and then you go again. It all sorts itself out. From an M&A perspective for childcare, everything is positive.
Anthony Newman, senior relationships manager in healthcare at Allica Bank
For 2025, the outlook has to be broadly positive, however, there are a number of headwinds. First, while the sector is seeking funding, it isn’t always easy to get this finance. The vast majority of nursery providers are independent operators, and mainstream lenders tend to prefer larger, corporate-level day nursery groups over smaller, independent operators and first-time buyers.
However, there are opportunities for funding, with challenger banks and private equity often providing more flexible and bespoke funding options to operators.
On top of that, the recent increase in NI contributions and minimum wage will require nurseries to recalibrate budgets and either find savings or pass on these extra costs.
2025 will be defined by two key market dynamics; rising demand from parents keen to utilise the extra hours on the one hand, and rising costs on the other.
Independent operators with a single nursery, or a small number of nurseries, make up around 80 per cent of the market. We have seen some consolidation with larger nursery groups scaling up ready to meet the growing demand. Ensuring smaller operators have access to finance and support will be key to maintaining a level playing field between them and larger operators.
Demand for nursery places is increasing. We have seen an increase in finance applications from a variety of providers, both new and established. While recent years have seen some consolidation, the vast majority of providers continue to be independent operators, and these businesses have a huge role to play in communities across the country.
The key thing is that the whole sector gets the support it needs, from areas including local authorities, staff investment and the financial sector, as it ramps up to meet the growing demand we’re likely to see over the next 12 months.
Key acquisitions at a glance
- Pippa Pop-ins, a group of four leasehold nurseries, was sold to Dukes Education last January. The nurseries were largely privately funded by parents because the cohorts did not meet the eligibility criteria for funded childcare. The transaction was conducted off-market and introduced to a finite pool of potential buyers because of the value involved. ‘We have never seen a transaction of four leasehold settings commanding that degree of value, and it’s unlikely we’ll see that sort of transaction again,’ says Donaldson. ‘Lots of buyers focus on London and the South East, but, as we’ve seen from that deal, buying best-in-class nurseries in London can command truly exceptional, premium prices.’
- The sale of Children 1st Day Nurseries to Storal Childcare for an undisclosed price was a significant moment as Margaret Mason stepped away from the group she founded after 36 years at the helm. The 24 settings located in Derbyshire, Leicestershire, Lincolnshire, Nottinghamshire, Staffordshire and South Yorkshire, along with a leading training centre, provide around 2,567 childcare places, with group turnover approaching £30 million.
- Kids Planet continued to expand, with purchases including the five Hollies Day Nurseries settings in Nottingham. The Hollies group, established by its previous owners 32 years ago, was run by experienced and long-serving teams, an important factor in securing the sale. All of its settings were rated Good or Outstanding. The acquisition took the Kids Planet portfolio past the 200-nurseries mark.
- Another notable purchase by Kids Planet was its acquisition of Tiptoes Nursery Group in East Yorkshire. The seven purpose-built properties in the group were sold as freehold, a rarity in a market that is increasingly focused on leasehold sales.
- iStep Learning, a nursery group formed in 2023 through the merger of The Nursery Family (six settings) and Bambinos Childcare Centres (four settings), has continued its consolidation by expanding to 23 settings.
- New consolidators include investment manager Downing, which established Chalk Day Nursery Group and acquired Katey’s Nursery and Pre-School, five settings in South-West London, in June.
