Investors are looking on the childcare sector as a rewarding market, reports Martin Pace
The key to any successful investment, like telling a good joke, is timing. And the timing looks right for the childcare sector. New nurseries are opening up all over the country, new chains are growing faster than ever and more company start-ups are planned. What effect is all this growth and competition having on the sector?
Land, which nursery operators seek for purpose-built units, is at more of a premium than ever, and 'silly' prices are being paid for those precious half-acres. Estate agents tend to generate an auction among the same handful of nursery companies and they outbid each other as pressure from their investor's mounts. Return on investment starts to drive business strategy and inevitably, many nursery companies are required to target the more affluent areas of the country to realise the returns required. Of course, this leaves the less affluent areas with insufficient childcare provision.
Higher premises costs mean higher charges for users, and childcare fees have risen above the rate of inflation, particularly in south-east England, where the rise in land values has been passed on to the customer.
While some nursery operators are going for growth, others are realising this may be a good time to sell. Peers Carter of STC, one of the established nursery agents, says that he is inundated with nurseries for sale, but finds that many vendors overvalue their businesses.
'Sellers' ambitions are rising, but the maximum multiple of five times profits seems to be holding, particularly for leaseholds. Very occasionally, good freeholds can do better.'
Other agents agree that it is only the better-run nurseries, operating from quality freehold premises that are able to achieve high values. And, viewing the nur-series on the market, many potential buyers have reported disappointment with the quality of operation they find.
In response to competition, Paul Foster of the Derby-based nursery group Treetops has launched Treetops Group 2000, a unique consortium of nurseries providing membership benefits to independent nursery operators all over the UK. The scheme is in its early stages, but Paul has set up a relationship with suppliers and is keen to emphasise the savings he believes he can offer to members.
'The group is not just about safety in numbers,' he says. 'There are substantial benefits which come with operating as a co-ordinated collective. We are delighted with the interest so far.'
It may be said that competition is good for any sector, but staff are getting harder to find and retain, and the problem is acute in the southeast of England. More nursery operators are recognising that many early years workers expect to make a career in childcare and if they are to retain good workers, then training and development has to be a priority.
Lesley Millar is managing director of Child & Co, a ten-nursery group based in Oxfordshire. She acknowledges that while the numbers of children have remained constant, increased competition has put pressure on staff recruitment and retention. She wants to ensure that Child & Co is the employer local staff choose to work for. 'Our business focus is to make Child & Co the "employer of choice" in all our locations. And we will only achieve this by knowing our staff and supporting them through their career growth,' says Lesley.
She has developed a number of staff-oriented initiatives, including the 'Special Moments Awards'. Lesley explains, 'If a parent or colleague notices a staff member taking extra care with a child - doing something that makes that moment special - then we reward them to show that we value their efforts.'
Across the UK, most observers agree that, in general, the quality of care is improving in the childcare sector. Such a factor must be influenced by competition.
All the growth and increased competition depend on more money coming into the childcare market. And there are more banks and other investors willing to risk investing in childcare for the potential rewards.
Of course, there is a precedent for the growth in this sector - the healthcare sector, in particular nursing homes. Initially, the nursing home market was made up of many, mainly single operators. Then came chains operating from purpose-built premises and, to grow quickly, they bought many of the single operators. When the chains reached critical mass, they then sold to a handful of giants.
If this pattern sounds familiar it is because the childcare sector is now in the second stage. And as long as demand for nursery places continues and funding is available, the sector is likely to follow the same path as nursing home care. Investors, particularly those who invested in nursing homes, recognise the parallels and are now poised to help nursery operators grow.
The easier money comes from High Street banks, and almost every nursery in the country will have secured some sort of funding from them. The Royal Bank of Scotland, one of the biggest investors in nursing homes, along with the Bank of Ireland, Bank of Scotland, NatWest, Barclays and others, is now poised to provide funding to well-run nursery companies.
Most banks have commissioned comprehensive reports on the sector. The verdict is that childcare can make a good investment, if certain criteria are satisfied. David Field, senior relationship manager at Royal Bank of Scotland, has invested successfully in healthcare and childcare companies. 'Many of the companies in the healthcare sector are too highly geared [i.e. they have borrowed too much as a percentage of the value of their company].... in the hands of a competent management team, a sensibly financed childcare company can offer us reasonable returns on our investment.'
The venture capitalists (VCs) have not been slow to join the childcare party either. Those VCs which invested successfully in healthcare groups have recognised the similarities with the childcare sector. Some of the VCs that have already invested in the childcare sector are: Apax and Botts Capital in Asquith Court; 3i in Jigsaw; Singer & Friedlander in Kids Unlimited; Northern Venture Capital in Careshare; Questor in Happy Times; Nash Sells in Nurseryworks; and a consortium of EAC, Phildrew Ventures, Foreign & Colonial and Commercial Union in Leapfrog. Other chains are now looking to the VCs to help fund their growth and are broadly being met with a favourable response.
At present, though, nurseries have to compete for funds with the new Internet companies, whose astronomical profits are making them a far more attractive option for investors. Andrew Hay, director of LCF Edmond de Rothschild Securities, a financial intermediary which secures funding for growth ventures, has noticed the interest in childcare. 'We talk regularly with institutions in the City and they recognise that the timing is right for childcare, but at present there is something of a frenzy for dot.com investment.'
The most frequent source of start-up income for nurseries seems to have come from ex-nursing home operators themselves. They have seen the parallels between the sectors - staff-intensive, highly regulated, operating from similar premises and even similar profit margins - and looked to childcare as the next best investment.
Healthcare money and experience have already funded several of the faster moving chains of nurseries. Richard Padgett's previous life before Bright Horizons was with Speciality Care. Just Learning's Duncan Bannan-tyne made his fortune in Quality Care Homes. It is less well known that the original founder of Leapfrog was Conway Standing, who came from a healthcare background and resigned shortly after founding the company. More recently, Mahesh Patel of Highclere has funded NuNu, another childcare operator with growth aspirations.
However, it is salutary to remember that after 15 years of growth, the UK nursing home market had, by 1998, reached saturation. While there is a huge market still under-supplied in the UK, it may be that the window of opportunity in childcare will be shorter than in the healthcare sector.
