Explainer: Nurseries and investment companies

When you’re a busy working parent looking for a childcare place, a nursery’s financial structures might be the last thing on your mind. But who owns your nursery – and what they do with the fees you pay – is an important issue. 

A growing number of nursery places in England are owned by investment companies. At least 1,048 Ofsted-registered nurseries were fully or partially controlled by such companies in 2022, an investigation by the Guardian this month has shown. This accounted for 7.5% of all nursery places, up from 4% in 2018.

Our explainer looks at what this means for parents. 

What are investment companies?

An investment company uses its clients’ money to buy stakes in businesses and other assets, or to purchase them entirely. These companies then aim to make the business more profitable, in order to make money for their clients. So, if an investment company has a stake in or owns a nursery, it will use the nursery’s profits partly to provide payouts for its clients. 

The trade in buying and selling nurseries has increased in recent years, and has started to attract private equity groups (one type of investment company), a report by the property advisor Knight Frank shows. Nursery transactions were worth £57m in 2021, versus £6m five years earlier.

Why are investment companies interested in nurseries?

The nursery sector’s underfunding crisis actually presents an opportunity – it means that many childcare settings are looking for investment or are up for sale. “These larger companies are…almost capitalising on the smaller ones going bust and collapsing, and they’re buying them up into the bigger chains,” says Antonia Simon, an expert in childcare financing at University College London (UCL).

England’s high demand for childcare makes it a potentially profitable business – childcare is an essential service for many working parents, and local councils are reporting growing shortages, the latest annual survey by Coram Family and Childcare shows. Nurseries are also an attractive investment because of the value of their buildings.

What are the pros and cons of this model for parents?

Proponents say investment companies can build big nursery chains that have economies of scale, thus helping a vital industry that the government has repeatedly underfunded. There is no data to suggest that settings backed by investment companies offer lower quality care.

But many childcare experts are concerned about a model that uses families’ fees and state funding to make profits for shareholders, rather than wholly investing those profits back into the nurseries. A 2022 UCL report, co-authored by Simon, found that investment companies mostly buy existing nurseries, rather than using their money to create new settings and tackle childcare shortages. The report also cited data suggesting that not-for-profit nurseries are willing to pay better wages, which is vital for retaining good staff. 

Critics also point out that investment companies use riskier financial models, which involve borrowing money to fund purchases and webs of transactions. This model has caused instability in the care home sector, with the 2011 collapse of the Southern Cross chain. Investment companies have also played a role in Thames Water’s woes.

What should parents ask when they’re looking at potential nurseries?

Parents can ask: who owns the business; who has stakes in the business; if they can see some annual reports; and what happens to any profits that are made. Are profits reinvested in the nursery and its staff? Or, if they leave the business, where do they go?

“For most families who have to cover childcare costs, [so much] of their income goes towards childcare,” Simon says. “So it’s in your interest to know that it is going towards improving the service for your child.”

What different types of nursery are available?

Private nurseries are a broad category that includes independent businesses, small local chains, and large national chains. Many will not have any link to investment companies. Some are social enterprises that commit to using profits to benefit their community.

There are also not-for-profit nurseries that are registered as charities, which means they have to comply with a host of financial regulations. Simon says the government should regulate all childcare companies’ finances along these lines, for example by requiring proof of their reserves, and it should also collect data on nurseries’ ownership structures.

“I don’t think a lot of parents know there are these distinctions in the market, and what is happening to the public money and their own money,” she says. 

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