Following our attendance at Education Investor's 2023 Education Summit this year, our day nursery specialists have reflected on some of the key topics shared at the event. Below, we have focussed on our top 5 takeaways from the Summit, which are currently being discussed within the early years sector, accompanied by some of our thoughts.
1. M&A activity in the education and early years sectors:
Whilst the high inflationary environment and increasing cost of debt has created a challenging M&A environment across the sector, there is optimism amongst investors and lenders that deal volumes will grow throughout 2024 and beyond.
Many predict that some owner-managed businesses may look to sell sooner with a general election on the horizon and what this could mean for changes in VAT status and Capital Gains Tax.
There has been a growing number of international students enrolling with UK independent schools despite the challenges arising from the Covid-19 pandemic, the cost-of-living crisis and the economic uncertainty. This trend is expected to remain strong and help fuel investment across the sector.
We are hearing similar messages from discussions we are having with clients and contacts across the sector. There is increasing investor appetite both within the UK and internationally, particularly within the early years sector with demand for placements increasing following the announcement of additional funding to be rolled out for one and two years from April 2025. The prospect of a change in government has often been a catalyst for increased M&A activity and we anticipate there being an increased number of transactions in the sector as sellers seek predictability around exit proceeds.
2. Funding challenges across the early years sector:
Current Government funding levels for early years education is generally viewed as a positive measure, but funding is often seen by operators as insufficient with many indicating that agreed rates may not cover the associated cost of providing childcare.
Sustainable funding should cover the costs of delivering high quality care and education. Many local authorities are yet to communicate the level of funding to be paid for September 2023, making it difficult for operators to manage cashflow.
In order to make funding more sustainable many experts suggest that flexible funding should be introduced, allowing operators to choose how the funding is applied to them. There was also discussion around income-based funding to allow for a fairer share of Government funding to support those operators that need it most.
The abolishment of business rates for nursery operators would be a welcome short-term relief, although many feel that should it be implemented, it is just deferring funding problems.
From discussions we are having with clients and contacts across the sector, the shortfall in Government funding is felt sector-wide although smaller operators and those operating within more deprived areas are being hardest hit. Other proposals we are hearing to allow for more sustainable funding is to bring in means-testing for the eligibility criteria for funded hours
3. Recruitment and retention challenges across the early years sector:
Recruitment and retention challenges have been present across the early years sector for a number of years but have been exacerbated by the impacts of the Covid-19 pandemic and Brexit. Whilst some of the larger operators have experienced a slight easing with recruitment, it remains one of the key challenges for many smaller operators.
Operators in and around London have experienced heightened recruitment issues with numerous alternative options for higher paid work.
To manage staffing, many operators are focussing efforts on the following:
- Further investment in apprenticeships and ongoing career support;
- Sponsorship licences for overseas workers;
- More emphasis on employee wellbeing and not just pay;
- Consideration of flexible working and matching staffing patterns to changing parent demands. Being a predominantly female workforce, many returning from maternity leave request a reduction in hours. Those with children of school age prefer working patterns that match the school day.
- Moving away from a one size fits all training style and adapting training to how people want to learn. For example, traditional classroom based learning, online learning, bite size learning;
- Better utilisation of unqualified staff who often have lots of experience and can be room leaders;
We still see many operators facing continued challenges with both recruitment and retention. The multi-site operators appear to be benefitting from being able to address these challenges centrally with head office staff being able to focus on recruitment efforts. However, this responsibility often rests with the nursery managers in single site settings.
4. VAT on tuition fees for independent schools:
The introduction of VAT on independent school fees could be implemented if there is a change in Government although no details have yet been provided as to what this may look like in practice including the rate of VAT that would be applied and the timing of implementation.
The general feeling is that any change to the VAT status would not be effective until September 2025 at the earliest.
The benefit of being VAT registered is that independent schools will be able to recover input VAT on certain costs and therefore may not need to pass on the full VAT amount on to parents.
Recovery of input VAT may also be available on capital expenditure, which again may enable schools to shelter the VAT increase for parents to an extent.
There are clearly many unknowns in relation to VAT on independent school fees. Whilst specific VAT advice may not be needed currently, we would encourage schools to undertake contingency planning (if not already undertaken) in order to understand what this will mean for both the school and for parents should a change arise.. There are likely to be commercial considerations around fee structure and potentially deferring capital projects although we would recommend specific VAT advice before implementing any changes in approach.
5. Environmental, Social and Corporate Governance (“ESG”):
Discussions around ESG are becoming more frequent across the sector with investors attributing value to high impact businesses.
Some of points discussed include:
- Encouraging more outdoor learning activities and reducing the use of electronic devices. Not only does this reduce utility costs but also contributes towards positive health and wellbeing.
- Sourcing the best suppliers for new furniture to ensure higher quality and longer lasting furniture. Where possible, many operators are also trying to upcycle old furniture.
- Some operators with outdoor space have vegetable patches, which is not only a great learning experience for children, it is also a good food source for the nursery.
- There is more focus on moving away from plastic toys to products that can later be recycled such as wooden toys.
This is particularly important for those operators thinking about an exit strategy in the not-too-distant future and ensuring that their ESG credentials are as good as they can be.
If you would like to discuss this further or seek tailored advice, please get in touch with firstname.lastname@example.org or call 01242 680000 and ask for a member of our Healthcare - Day nursery team.