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‘Our nursery was bought by private equity

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Lucy* was a nursery manager until her workplace was purchased by a private equity firm. “It was my decision to leave,” she tells me. “When the nursery was bought out, I just didn’t feel that it was for me, the way they wanted to manage it.”

Lucy’s nursery is one of a rapidly growing number being bought out by private equity firms – investment funds that acquire and take over the management of businesses in order to maximise profits for their investors. Small, often female-led businesses are being subsumed into huge groups. Private equity firms are now responsible for the largest nursery chains in the market, including Kids Planet Day Nurseries and Just Childcare.

According to the Department for Education, 70 percent of group-based providers are run privately, while research by University College London (UCL) suggests that the proportion of single-site providers – like the one Lucy used to work at – dropped from 85 per cent in 2016 to 62 per cent in 2019.

“For me, the children always come first. I will not look to double my profit, just to benefit myself.” The need to make money, Lucy says, “needs to be balanced, and not jeopardise the quality, and the wellbeing of the children and staff.”

Childcare has become a political hot potato in recent times. On the one hand, the soaring cost of care is increasingly unaffordable for the parents of young children. On the other, providers are struggling to balance their books when faced with rising costs for staffing, energy and food, especially in deprived communities. Many say they are at risk of closing down, exacerbating a shortage of nursery places. Ofsted reports that there was a net loss of 400 nurseries in the year to 31 March, 2023.

In an effort to turn the tide, the Government has just rolled out a flagship new scheme, which offers 15 hours of “free” childcare for two-year-olds, extending to 30 hours for children aged nine months and above from September 2025. This came into effect yesterday.

This means the taxpayer will have an 80 per cent stake in the sector by 2025, according to the Institute for Fiscal Studies (IFS), up from 50 per cent now. Currently, all three- and four-year-olds are entitled to 15 hours per week of free childcare or early education, rising to 30 hours for working families, and 15 hours for disadvantaged two-year-olds, over 38 weeks of the year.

But in many ways, the new scheme has only made things worse – creating extra demand within an already overstretched system, while the Government funding on offer is unlikely to be sufficient to cover the hours of childcare it is promising.

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Many say they are at risk of closing down, exacerbating a shortage of nursery places. Ofsted reports that there was a net loss of 400 nurseries in the year to 31 March, 2023 (Photo: Natalia Lebedinskaia/Getty)

And yet, while many providers are struggling to keep their doors open, private equity firms have spotted an opportunity. “The market is a real Wild West,” Abby Jitendra of the Joseph Rowntree Foundation (JRF), the author of a new report on the subject, tells me. With nothing in the way of financial regulation, and in a market where demand often outstrips supply, there’s money to be made, from middle-class parents in affluent areas in particular, who have no choice but to stump up the cash when both parents need to work.

“If you work backwards from the returns that these private equity firms are expected to deliver investors,” Jitendra explains, “which is around 15 to 20 per cent, you can imagine that they will use a range of tactics and strategies to do that, such as keeping worker pay as low as they can, and increasing fees to parents as much as possible.” These profits, according to the JRF study, are around twice those made on average by non-private equity backed providers.

Currently, there is no price cap on what nurseries can charge on top of the hours the government funds. And in buying up nurseries, private equity firms are doing little to relieve the pressure on the system for places, which makes for a highly skewed market.

There is also evidence that private equity-backed nurseries are looking to increase their profit margins by reducing the cost of their workforce. A 2022 study, led by Antonia Simon, associate professor at UCL’s Social Research Institute, found that for-profit nurseries were investing notably less of their profits into staffing costs than their not-for-profit counterparts.

Nursery work is typified by very low wages, very little career progression, and low retention,” Kate Hardy, professor of global labour at Leeds University Business School, tells me. “The average pay is £7.50 per hour when you factor in apprentices, who can be paid below minimum wage [currently £11.44 for those over 21 or £8.60 for 18- to 20-year-olds]. So you have a set of people who are highly committed and deeply connected to their occupation, but they feel they cannot stay in the profession, particularly in a cost of living crisis. Morale is through the floor.”

What the larger private equity backed chains do sometimes offer, Hardy acknowledges, is a more structured HR system due to their size and economies of scale. “It can sometimes mean they have more ability to do things like give people a bit of training, as well as more of a career path, because there is the opportunity to become, say, an area manager.”

This is one way in which chains can outcompete smaller competitors: “It means they can poach people from independent nurseries, but from the conversations I’ve had, when those people actually get there they tend to find their experience isn’t better in terms of how they’re treated,” says Hardy.

All of these profit-maximising measures can have an impact on the quality of the provision, according to parents. One mother, an NHS junior doctor whose son started at a nursery in London while it was still independent, tells me about how things have changed during her daughter’s time there, following a private equity acquisition.

“Our nursery is just not as good since they took over. The activities and events with the children aren’t as good. The food isn’t as good. The communications aren’t as good. The personal development aspects of the kids aren’t as good,” she says.

While she feels standards have been slipping, the cost has continued to skyrocket, with fees rising by 40 per cent over the five years she’s been sending her kids there. In 2023, the nursery wrote to parents claiming the latest increase was due to “economic pressures”, but when, with the help of chartered accountant Vivek Kotecha of Trinava Consulting, we analysed the figures for the nursery group, we found a profit margin of nearly 15 per cent. “It’s a racket,” the mother claims. “They know that the waiting lists are over 12 months in many places so they can just increase prices and there are no other options.”

Another mother tells me they’ve seen an 18 per cent rise in fees since their nursery was bought out. “It’s such a shame, as it was family-owned before,” she explains, “but they were retiring. I think they were sad about it, but not many people can afford to buy out a property and a business of that size, so they didn’t have much choice.”

Kotecha draws parallels with other markets that have seen heavy private equity involvement. The Competition and Markets Authority recently launched an investigation into pricing in veterinary clinics, for instance, after discovering pet owners may be significantly overpaying for treatments and medicines in a market where smaller providers are allegedly being pushed out of business by private equity-backed chains.

Private equity involvement in veterinary practices and adult social care has become entrenched, but when it comes to childcare, according to Kotecha, we’re still in the early stages of the process. “They’re on a buying spree,” he explains. “This industry is about consolidating.”

Associate professor Antonia Simon agrees. “They’re not hiding away from any of this,” she tells me. “We frequently found the childcare sector being described as a ‘hot market’.”

Another concern when it comes to private equity’s strategy of consolidation, she adds, is that all of these acquisitions require a lot of borrowing. “We found that the private companies were carrying a lot of debt, and operating with little to no financial reserves,” she cautions.

“In contrast, the not-for-profits – and in particular the charities, whose regulations are bound by the Charity Commission – are not allowed to operate without an underlying reserve in place.” Highly leveraged debt and increasing market dominance brings with it the serious risk of one of the major players collapsing.

“We found that a lot of these firms are structured in a similar way to those in the adult social care sector,” Simon continues, “where there have been quite a few very prominent examples of big chains collapsing almost overnight.”

The opaque and complex structures of these firms make it hard to trace where the money is flowing to and from, but Simon has discovered that a significant amount ends up offshore. “We do know that a beneficiary of one of the biggest chains in the UK is a Canadian teachers’ pension fund,” she tells me.

The truth is, as the JRF report and Simon’s work at UCL identifies, none of this is going to change until we bring stronger regulation into the sector, and start valuing child care properly – both in terms of the money the government is putting in per hour, and the importance of the work nursery workers like Lucy do.

“I’m glad you’re writing this piece,” Simon, who is also a concerned mother, confides. “If enough of us make a noise about this, hopefully people will start to take notice and finally things will begin to change.”

*Name has been changed

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