Q1 2022 Market Themes
Macroeconomic Backdrop
In the face of rising inflation, a hawkish Federal Reserve, and continued global uncertainty, many economics have suggested that the US is nearing the end of a “late-cycle expansion phase,” or the conclusion of a growth cycle that comes right before a contraction. With the end of the first quarter of 2022, the broader market has begun to price in some of the continuing risks to economic growth, forcing investors to reconsider the trajectory for the rest of the year. The March 2022 survey by the University of Michigan found that consumer sentiment fell to a new decade-long low as concerns about inflation grow amid the ongoing Russian invasion of Ukraine. Despite the these headwinds, investment activity in the child care sector continue to stay elevated in 2022. Private Equity has continued to leverage liquidity and fuel M&A activity in the child care sector as well..
Child Care Industry Backdrop
Strong Transaction Activity. Despite global volatility, COVID related impacts, and rising interests, there was a significant amount of transaction activity and buyer appetite in the child care sector in Q1 2022. Strategic buyers drove most of the activity among a backdrop of increased confidence as COVID cases subsided and capital availability remained high.
Seller’s Market. Child care owners have become increasingly more engaged as potential sellers as their enrollment and financial performance continues their recoveries towards pre-covid levels. Many had laudably focused on child safety and business operations to make it through the pandemic.
Omicron Impact. The spread of Omicron was a disruptor; dampening the pace of enrollment growth in early 2022 as families pushed back their start dates. Omicron also impacted the already burdened labor market, creating issues for schools that had parent demand but couldn’t staff up to meet ratios. Since March, many providers have seen improving enrollment trends.
Labor Shortage & Rising Wages. The labor shortage has impacted the ability of childcare providers to take on additional enrollment to meet rising demand for care. Our survey found the labor shortage has reduced occupancy rates by about 5 to 8% on average. This impact is also leading to higher wages and placing more emphasis on expanding employee benefits offerings.
Tuition Increases: The average tuition rate increase for the next academic year that was communicated to parents earlier this year was roughly 5% among the premium provider segment. This rate is higher than previous years and reflective of the overall inflationary environment across the board.
Federal Funding. As the Build Back Better spending bill stalled this past winter, many congressional leaders have attempted to revive the child-care component of the bill. The SchoolWise Partners team views the long-term effects of this as a positive for childcare owners.
KinderCare IPO. The largest child-care company in the U.S, KinderCare, refiled for an initial public offering in March 2022 after delaying its original offering one day before the stock had been set to begin trading in November. The company cited regulatory issues as the cause for this delay. In our next report we will comment on KinderCare’s IPO and highlight some of the relevant items for participants.
SchoolWise Partners acted as the exclusive sell-side advisor on various transactions that closed in Q1 2022; representing approximately $50 million in transaction value for its clients. In addition, our team is currently advising on various school sale transactions for its clients in the child care sector, that represent approximately $75 million in transaction value and expected to close in Q2 2022. If you are interested in selling your school business or real estate, please reach out to one of our team members for an introductory call.