The fundamentals underpinning the UK early years sector “remain the same: compelling and investable” despite headwinds spurred by the Covid-19 pandemic, according to new research.

The childcare market has arguably “manoeuvred through the crisis better than other sectors of the [UK] economy”, consultancy Cairneagle Associates and Laing Buisson state in an update to a joint report published last February, before the pandemic had overwhelmed global economies.

The sector “remains attractive” to investors, the firms noted, because it showcases “strong growth fundamentals and resilience in economic downturns”, which are expected to continue this year until the UK’s economy is released fully from lockdowns.

In addition, there is “strong support” from debt providers to investors in the sector, while nursery acquisitions can be earnings-per-share accretive, meaning that once acquired businesses trade at a higher multiple of their earnings as part of a larger group.

As a result, M&A activity continued throughout 2020, with notable deals including The Old Station Nursery Group’s takeover of Sunhill Daycare, August Equity-backed Family First’s purchase of Head Start, and ICP Nurseries’ merger with Cresswell.

However, Cairneagle and Laing Buisson’s update highlights the acute stress under which nursery operators were placed in the first half of last year, when nationwide lockdowns prompted a nosedive in occupancy levels.

In April 2020, the National Day Nurseries Association (NDNA) revealed that nursery providers were operating at 12% of their usual occupancy levels on average.

Nearly a fifth (17.5%) of operators at this time had to charge parents or request voluntary contributions of up to 25% of fees in order to stay afloat.

“In a very challenging environment with nurseries struggling to remain viable”, just under 2% of operators were having to ask parents to pay full fees to ensure they could pay overheads and remain solvent.

In June, according to a survey commissioned by the Department for Education, half of parents were expected to re-enrol their children with their nursery provider of choice.

But on 4 June, childcare providers were operating at just 10% of term-time capacity.

By September/October, occupancy ranged from 60-105% of the previous year’s level, Cairneagle and Laing Buisson said in their update.

Operators north of the border were hit harder: Scottish sites recorded occupancy of 30-75%, while English settings averaged 50% in October 2020.

In November last year, Cairneagle surveyed “leading groups” and received 30 responses, which showed that average occupancy was 85%, with “significant variance” and some groups that outperformed the previous year.

Despite widespread hardship across the UK early years sector in 2020, Cairneagle noted that “most operators we have spoken with expect [to] recover through 2021, which is in contrast to some of the previous rhetoric about closures”.

Moreover, the majority of respondents planned to either grow (50%) or hold stable (32%) their business.

Less than a fifth of respondents expected to sell or close nurseries, while none were contemplating an exit.

Date published: 12 March 2021

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