NMT Nursery Business Seminar 28 October 2014

1. CHILDREN’S NURSERIES It’s all about demand & supply! By Philip Blackburn Economist, LaingBuisson NMT Nursery Business Seminar 28 October 2014

2. LaingBuisson – Leading provider of market intelligence on the independent health and care sector Children’s Nurseries – We carry out a survey of children’s nurseries each year. Been doing it for over 10 years, so we have a useful perspective on trends NMT Nursery Business Seminar 2014

3. Headlines for 2014 LaingBuisson Nurseries Report • Good rise in demand, as total children attending nurseries increased by over 6% between mid 2013 and mid 2014. • (Driven by stronger economy & 2 year old places expansion) • Real spending on UK children’s nurseries up by over 4%, • (Driven by demand growth, though held back by reduced average attendance, and no real fee inflation) • Demand growth accommodated by existing supply (shown by clear rise in average occupancy of at least 2 percentage points), and supported by increase in net nursery stock • (Momentum for increased capacity across the sector) NMT Nursery Business Seminar 2014

4. Demand Thermometer – Recent Past 2014 2009 Population Economy Employment Direct Subsidies Childcare Tax Credit Strong driver Corporate inc Tax Credit Modest driver Childcare Preferences Weak driver/ dampener NMT Nursery Business Seminar 2014

5. Demand Thermometer – Next 5 Years 2019 2014 Population Economy Employment Direct Subsidies Childcare Tax Credit Uncertain Strong driver Corporate inc Tax Credit Uncertain Modest driver Childcare Preferences Weak driver/ dampener NMT Nursery Business Seminar 2014

6. NURSERY FEE INFLATION, UK % LaingBuisson measure RPI NMT Nursery Business Seminar 2014

7. Supply Trends – Recent Expansion • Clear increase in UK nursery capacity (places) in the last 12 to 18 months as the economy improved, and places for 2 year olds have been absorbed by sector. • New capacity comes from a lot of different providers of various size. Consistent with nationwide expansion. Preference for purpose built properties. • Just over half of the Top 100 UK nursery groups expanded their nursery portfolio in the last 12 months. • However, rate of closures remains at a high enough level, checking faster growth – supply excess in certain regions • Corporatisation rate is 1 to 2 percentage points per annum. Nursery groups (corporates) now represent a quarter of capacity (places). More than 20 years and corporates may represent half of market! NMT Nursery Business Seminar 2014

8. Supply Trends – Investors • Stronger optimism for future market growth and prosperity – look at 5 year demand trends. • Many small to medium sized nursery businesses with strong cash positions, access to internal investment, and supported by bank debt. • Private equity has a presence in the market and new interest may soon pick up. Large-scale consolidation is currently elusive but may be a matter of time. • Profitability of nursery groups has improved according to recent financials, though performance remains variable across providers. Improved profitability is likely to attract larger investments. NMT Nursery Business Seminar 2014

9. Supply Trends – Future Risks • Capacity grows faster than demand, leaving excess capacity. Risk because market can be considered ‘mature’ and some demand drivers may weaken. Regional risk of excess capacity. • Increased Competition & ‘Overcrowding’ – At the moment, despite strong government support, most schools do not have appetite for direct childcare provision, and prefer to partner nurseries & others. This could change, however, should appetite change, and schools have huge scope for growth. • Ofsted – sector quality standards can be vulnerable • Heavy reliance on government subsidies – is this sustainable? Impact on private self-pay business, cross subsidies are inefficient, and likely to raise cost of nursery care – not a good thing for the sector. NMT Nursery Business Seminar 2014

10. Nursery Market Summary – Where we are Demand is stronger and rising Supply is growing to accommodate demand and expected higher demand in the future Business and investment confidence has improved generally, facilitating supply growth However, it is a mature market, demand can become vulnerable quickly, and there are a number of uncertainties/risks which could shift dynamics. NMT Nursery Business Seminar 2014

11. Government Policy – Important Questions Universal vs Means Tested - What is priority? Quantity v Quality - What does price dictate? Multiple Funding Streams v Single - Are there efficiencies? Childcare Provider v School Provider - Should it matter? Parent v Provider - Who Gets the Money? NMT Nursery Business Seminar 2014

12. What I would like to see? I believe there could be pay-offs from a single funding stream which is based on a universal core offer which has means tested stabilisers. Try to harmonise incentives to use childcare and access work to support choices of all parents. Price paid to be flexible enough to reflect/reward outcomes achieved, and support competition based on price and quality of outcome for children. NMT Nursery Business Seminar 2014

13. All statistics and information available in: • LaingBuisson’s • Children’s Nurseries - UK Market Report 2014 • Out early November 2014 • www.laingbuisson.co.uk • philipb@laingbuisson.co.uk NMT Nursery Business Seminar 2014