The road to recovery for the childcare market

Looking ahead, the road to recovery will be a long and bumpy one. We can see the light at the end of the tunnel but to get there, pre-pandemic issues such as funding, recruitment and retention must be addressed.

The closures of nurseries to most families at the beginning of the Covid-19 crisis have underlined the importance of access to childcare, both to support paid work and to help shape young children’s environment and development.

Since then, the UK Government announced a series of support packages including:

  • Business rates relief – From 1 April 2020, providers of childcare were to pay no business rates through to the end of March 2021, with further exemptions to March 2022 subsequently announced.
  • Coronavirus Job Retention Scheme.
  • Funding for nurseries promised at the same level as historic levels rather than on attendance for Summer and Autumn 2020 (this did not, however, cover the loss of private revenues).

Despite these measures, the pandemic has had devastating financial and operational consequences for childcare providers and the impact may be felt for years to come.

Arun Kanwar, partner at Cairneagle and his team researched and wrote the 16th edition of the LaingBuisson Childcare Market report last year, and released a Covid update earlier this year.

Speaking about some of the findings and sharing insights about the past year, Kanwar said that Cairneagle is confident in the sector’s sustainability but highlights the importance of flexibility as we move towards recovery.

Regional and segment outlook

There is no denying that there has been a significant shift in work and life patterns and much of that will be here to stay. However it is a complex situation with recovery and growth not expected to be uniform.

Across the UK, London has witnessed one of the highest increases of unemployment. That being said, those job losses are likely to be concentrated on younger, lower income earners – many of the working professionals will have kept their jobs and still need childcare. The city is also reasonably well primed to recover over time once restrictions are lifted.

‘From a workplace perspective, there has been too much infrastructure investment in central London to ’let it fail’ and we expect the government to find ways of stimulating a return to work – even if not to the same levels as historically.’ Kanwar states.

‘Also, while we are witnessing people moving out of central London, that doesn’t mean you will get a massive drop off in the long term.’

This change goes hand in hand with the evolution of working patterns and parental behaviour as settings located in dense, residential areas are expected to outperform ones in workplace and commuter nurseries.

‘There are other factors at play here too and segments that will benefit, for example, residential areas where you have working professionals, with parents deciding to buy more locally on account of more home working. In the same vein, we expect that ‘commuter’ towns to big cities will benefit as people are prepared to live further from workplaces if they going to their offices less frequently.

‘And of course, there is the levelling up of the North, which is already gaining traction.’

‘Work place nurseries, on average will most likely not see the same demand as they once did. Some will be more protected than others –  such as hospitals and other workplaces where employers are required to work onsite.’

‘Clearly there will be some reversal when workplaces open but this pandemic has irreversibly changed the way we view working patterns so I don’t think it will return to exactly how it used to be.

Last summer, Bright Horizons released the findings from a survey of 1,500 parents. Working full time in an office was the norm with 96% stating that was their work routine. However, only 13% of parents want to go back to working full time in the office after the pandemic.

Early years investment landscape

Historically, the early years sector is one of resilience that has, in past recessions, recovered quicker than other sectors.

Despite the economic uncertainty ahead of us, the sector remains an attractive one to invest in. Earlier this year, Christie & Co launched its annual Business Outlook report, ‘Business Outlook 2021: Review. Realign. Recover,’ which reflects on the themes, activity and challenges of 2020 and forecasts what 2021 might bring.

Market predictions from Christie & Co included:

  • Continued consolidation with regional providers gaining market-share.
  • Private equity divestments potentially due to debt over-gearing rather than due to business performance.
  • Larger providers divesting of assets more suited to sole trader operations.

Childcare is an essential part of the UK’s economic infrastructure and will be crucial as part of the road to recovery.

Kanwar agrees that there is still significant investor appetite with acquisitive activity in the market continuing through 2020 and into 2021.

‘In past recessions and times of crisis we have seen how the early years sector can recover and of course it will need support through this year to do that.

‘It is well positioned to recover but there have been some changes. I’d say that average multiple has gone down. The distribution of multiples may be similar to pre-Covid times but the proportion of deals with higher multiples have gone down. Quality businesses which have weathered the crisis well continue to be in demand will still attract high valuations – with lots of buyers chasing after them.

Cairneagle expects the path of the M&A market to be closely linked to the actions of the Government over the coming months.

Concluding, Kanwar states:

‘We are starting to see the light at the end of the tunnel, especially as vaccines take hold. The provisional pathway out of lockdown will boost our economic recovery but there are some things that will remain after Covid.

‘There has to be an undoubted recovery. Whilst overall demand for childcare will likely be down in the short to medium term due to higher unemployment, many segments of the market will be stable or even stronger than before. Flexibility, both in the sector and in the workplace will be key to meeting the new needs of parents and carers.

‘If you are struggling with enrolment or funding etc, my advice would be to seek help from a membership group if you are part of one. They are well equipped to help operators navigate through the challenges and the positions of both central Government and the Local Authorities.’

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