Earlier this year, Cairneagle published a survey for nursery providers outlining the current challenges.
The company’s managing partner Arun Kanwar dives deeper into how valuations are being affected.

Given the current inflationary environment, how have valuations fared across England?

“Until early 2023, valuations in the early years space had held up much better than for other sectors. This was because, even though interest rates were already becoming high and enrolment hadn’t recovered to pre-pandemic levels, lots of groups had already effectively placed their bets on consolidation, which was in turn buoying demand for acquisitions and pricing.

“Since then, however, the sector has had some mixed fortunes (including occupancy being held back by staffing, and margin pressure on account of the inflationary environment and agency costs), interest rates have increased further, and a few groups have needed to double down on optimising their existing estate rather than focus on growth.

As a result, we have seen some easing of demand for acquisitions, and so prices have softened a little. The best businesses, large and small, are still attracting significant interest and are commanding higher valuations, but sellers should be prepared for more discerning and demanding buyers, who have to get their stakeholders comfortable with the investment thesis.”

Any notable shifts in demands or regions?

“There had been a historic focus from many acquirers on London and the Home Counties due to the affluence and the stability of demand. However, before Covid-19, groups had already started to explore other regions in an attempt to buy businesses at lower multiples. That accelerated through the pandemic as people migrated out of parts of London and the Southeast.

Despite the fact that there has been a decent return of populations to the Southeast, the demand for nurseries acquisitions in other parts of the country is staying strong, in part because it can be easier to staff outside of London and the Home Counties.

In your recent UK nursery operator survey, it was noted that while occupancy has increased, it is still two percentage points below pre-Covid levels. How has this affected valuations?

“Although occupancy is still behind pre- Covid levels, valuations were close to an all-time high last year. However, some of the current challenges in the sector are beginning to impact appetite and multiples.”

What do you estimate we will witness over the next 12 months in terms of valuation levels?

“Valuations multiples are likely to remain under downward pressure in the short term as a consequence of higher interest rates (more expensive debt has to mean lower pricing), which are expected to stay high for some time. That said, we are excited about the longer-term outlook for the sector, driven in particular by the new funded offer for zero-to-two year olds, which we believe will result in significant enrolment growth in the sector in the coming years – that will of course mean that appetite for M&A in the sector will continue, and we should see valuations pick up again.”