Childcare sector in England must not become ‘playground for private equity’, experts say

England’s childcare sector risks becoming a “playground for private equity”, experts have said, as exclusive analysis from the Guardian reveals investment funds have more than doubled their stake in the sector in just four years.

The findings come as the Treasury prepares to spend an extra £4bn a year of taxpayers’ money funding nursery places.

The research prompted warnings that the increasing involvement of private equity in the sector could leave providers more vulnerable to closure and do nothing to address the shortage of places in deprived areas, where parents cannot afford to pay as much for childcare.

The Guardian’s detailed analysis of Ofsted-registered nurseries reveals that in 2022 at least 1,048 were fully or partially controlled by investment companies, including private equity and venture capital firms – 7.5% of all nursery places, up from 4% in 2018.

Investment funds ultimately own nearly 81,500 childcare places in England – almost double the 2018 total.

The rapid growth means thousands of nurseries could be vulnerable to collapse, according to unions and experts, who say that the chaotic near-demise of Thames Water and the high-profile failures of private equity-backed firms in adult social care should act as canaries in the coalmine.

A UCL report last year warned that nurseries were being snapped up by profit-focused companies that were “heavily indebted” with “risky financial operating models [that] could threaten the provision of nursery places”. The research found “market dynamics can lead to insufficient coverage in poorer, less profitable areas”.

These potential risks were highlighted in the adult social care sector, with the high-profile collapse of Southern Cross in 2011 and of Four Seasons Health Care, which is operated by administrators after a previous owner, the private equity firm Terra Firma, racked up huge debts.

Mike Short, the head of education at Unison, said many parents relied on privately owned nurseries for their childcare that needed to make money to survive.

He said: “If these companies don’t make money, they go under. But once private equity firms become involved, the pursuit of profit is ruthless and on a whole new level. The structure of equity-funded nurseries is so complex, often with hundreds of subsidiary companies created, that it’s almost impossible to fathom where the cash is going.”

The Trades Union Congress (TUC) said the early-years sector needed sustainable and long-term investment – not “fly-by-night merchants looking to make a quick buck”.

Joeli Brearley, chief executive of the campaign group Pregnant Then Screwed, called on the government to intervene and put measures in place to “guard against serious profiteering”, adding that private equity should have “no place in the education and care of our children”.

She said: “Placing early learning and care in the hands of private equity is to play Russian roulette with our children and the economy. Childcare mustn’t be another playground for private equity – the risks are too great.’’

Dr Antonia Simon, a leading expert in childcare sector financing at University College London (UCL), also said providers that are heavily reliant on private equity funding were more likely to have high debt, low cash reserves and be at significantly greater risk of collapse.

She said: “If these nurseries collapse, as we have seen in the adult social care sector, children and families will miss out on vital and valuable early years care and many nursery staff could lose their jobs. The government must make urgent reforms to make the early years sector more transparent and accountable.”

Private equity and venture capital firms have made at least 500 investments – including acquisitions, mergers and buyouts – in the UK early years and childcare sector in the last decade, with 112 of those taking place in 2022, separate Guardian analysis of the venture capital database PitchBook reveals.

The data analysis does not suggest lesser quality in such facilities. Indeed some providers cited high quality ratings in their response to comments from the Guardian.

Responding to the Guardian’s research, a spokesperson for the British Private Equity and Venture Capital Association said: “The inferences being made here about the role of private equity don’t reflect the real world – the average private equity investment is well over five years compared with five months on the public markets. This long-term commitment from private equity investors is essential in helping companies grow in a responsible way.”

The latest annual accounts of Eagle MidCo, the parent company of Busy Bees, shows that the company’s long-term debts were more than seven times higher than its pre-tax earnings, according to their latest accounts. The company disputed this ratio, saying that this figure included future commitments to pay rent.

The biggest nursery chain in England, Busy Bees Nursery Group, is owned by the Ontario Teachers’ Pension Plan (OTTP).

A spokesperson for Busy Bees said it had long been recognised as a leader in childcare, that 97% of its nurseries were assessed by Ofsted ratings as good or outstanding, and that “the scale and quality of our services, people and centres have further improved through considerable investment by OTPP” over the past decade.

They said it invested proportionally more in its existing facilities and in opening greenfield facilities than comparable nursery chains, including investment of close to £100m in the past two years.

The nurseries backed by investment companies include some of the biggest groups in England, such as Kids Planet, which was bought by the private equity firm Fremman Capital at the end of 2021. The provider, which was first backed by the private equity firm BGF, has gone on a buying spree of rival nurseries in recent years – quadrupling the number of its childcare places between 2018 and 2022, from almost 2,800 to more than 11,500.

The Dutch private equity firm Waterland acquired the Partou group in May 2022 – the largest childcare provider in the Netherlands. Partou recently moved into the English market, acquiring the nursery groups All About Children and Just Childcare, among other providers.

The London-based Oakley Capital bought and rebranded Bright Stars Nursery in 2021, one of the fastest-growing childcare groups.

In response to the Guardian, a spokesperson for Partou said recent reports commissioned by the Dutch government showed little difference in quality between social and commercial childcare organisations in the Netherlands.

They also said the current generation of private equity funds focused on quality to improve childcare organisations and professionalise the sector, and that the fears of prioritising financial returns over public interest were unfounded.

They added that Partou and its holding companies were part of an environmental, social, and governance fund established by Waterland that had a focus on sustainability and responsible investing.

Responding to the Guardian’s findings, Bridget Phillipson suggested that a Labour government could tighten rules around the ownership of childcare settings. The shadow education secretary said: “As part of the reformed, modern childcare system Labour will create with better support for families, we will introduce stronger regulation of providers’ financial sustainability to ensure sustainability of the sector.”

A Department for Education spokesperson said: “We will continue to closely monitor the sufficiency of childcare places as we roll out our single biggest investment in childcare in England ever, set to save a working parent using 30 hours of childcare up to an average of £6,500 per year.”

Kids Planet, Fremman Capital and Oakley Capital were approached for comment.

Additional reporting Zeke Hunter-Green and Lucy Swan

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