Will growing nursery demand lead to an uptick in private equity activity?

The UK nurseries market is a current hotbed of activity: there are more than 27,000 Ofsted-registered providers supporting more than 1.4 million young children, employing over 180,000, and contributing more than £6 billion annually to the UK economy, in data identified by Savills’ Children’s Day Nursery Spotlight (Autumn 2023). The policy changes introduced in April 2024 giving 15-hours free childcare weekly for two year olds, and the same allowance for nine month olds introduced September 2024 has driven demand, which is a contributing factor to recent interest from private equity.

As it stands, there is no single nursery provider who holds more than 5% market share – with the three biggest names in the industry (Busy Bees, Bright Horizons, and Kids Planet). Much of the market is fragmented into small, independently-run providers, which has meant much of the M&A activity has been the larger players acquiring smaller operators – with the first half of the year recording an increase of 16% in the volume of day nurseries available for sale.

Recruitment and retention of qualified staff remains a consistent challenge for the nurseries sector, driven by concerns linked to low pay, high-stress, long hours and limited career progression. High turnover of staff can cause reservations around investment by private equity, so it has been identified as a key area to address by providers and operators looking to go to market.

An increase in costs such as utilities, and the change to government funding for heavily discounted schemes for children at an earlier age, has caused additional financial strain. To counter this, nurseries have often increased fees to cover costs. This predictable cash flow owing to the high demand from families, government funding, and recurring fees makes the sector a highly attractive target for private equity.  

March 2024 saw 87% of early years providers being rated as Good or Outstanding by Ofsted, reflecting a commitment to quality despite some of the challenges outlined above. It is fair to say that the sector remains buoyant in terms of demand for its services, and wider investment interest from private equity – however to ensure quality childcare is delivered, and staff feel valued, concerns around recruitment and retention will continue to play on the minds of the investment community.