Weathering the storms: State of the market

UK social care and education continues to be a relatively safe haven for investors, institutions and funders in what is an increasingly volatile and uncertain world but the sector has not been immune to macroeconomic factors. Cost of living pressures, the energy crisis, an extremely challenging recruitment market and more recent debt market volatility have all had an impact on trading performance and deal volumes.

However, despite the significant challenges facing the sector, many social care operators have successfully adapted and continue to invest for growth.

Innovative approaches to traditional working practices are helping to provide solutions to commissioners and private payers alike as they seek to engage with high quality and sustainable providers. An ageing population and earlier diagnoses are also leading to increased demand for the services provided in the sector.

As a consequence, investor appetite remains strong across all aspects of social care, healthcare and education.

We have set out our current views together with those of operators, investors and funders. We have briefly touched on the various subsectors of social care and education where we are most active.

Outlook

RECENT VALUE TREND

Elderly Nursing And Residential Homes

Continued investment from real estate investment trusts, overseas investors and long-term income investors has ensured a flow of new homes opening. Demand is increasing from both local authority and after a reduction in private admissions during COVID-19. The tertiary market is becoming starker with a much lower demand for older stock without en suites/ wet rooms, with many such assets closing and being subject to a change of use (often looking at residential redevelopment).

Specialist Care

Specialist care continues to be a highly sought-after sector for investment and funding, as well as more bespoke sale and leaseback transactions from real estate investors. High demand from the consolidators for good quality operators ideally including freehold, but often “opco” only. Significant opportunities exist to grow, particularly in supported living and specialist (complex) home care, which continues to push up multiples.

Domiciliary Care

Demand for domiciliary care has remained high following the exceptional trends seen during the peak of COVID-19, despite increased movement of service users into residential or nursing homes. Lack of staff resource continues to be the major challenge to the sector and is constraining growth, as well as affecting margins due to wage inflation. Social care funded services face a particular challenge, as private-pay operators have been able to manage margins more effectively. Private equity investment and consolidation by privately owned mid-sized corporates continues.

Specialist Education

SEN education continues to be a growth area, particularly for children who are not in school and need to be educated either within specialist settings or at home via specialist tutors. Consolidation continues in the sector and invites a steady supply of investment. A number of operators are actively seeking to open new SEN services across the country as local authorities seek alternative and more effective solutions beyond mainstream education.

Fostering

Despite good quality earnings through the pandemic, foster care agencies are struggling to recruit the number of foster carers required to deal with demand. As a consequence, some larger operators have struggled to grow placement numbers. There is still consolidation by a smaller number of larger players, as well as some recent private equity transactions and transfers of larger businesses into employee ownership trusts.

CHILDREN’S SERVICES

With the difficulties in registering new children’s homes, be it planning, registration with Ofsted or recruiting good quality managers, the demand for residential placements continues to outstrip supply. The publication of the CMA report in March 2022 into Children’s Social Care underlined the shortage of provision, although the subsequent consultation by the Welsh Government to eliminate profitmaking provision has created potentially unwanted uncertainty in that area. There has been a marked increase in transitional care or leaving care, which will become subject to greater scrutiny and regulation in 2023 and is attracting significant interest from existing operators and investors alike.

Day Nurseries

Following a period of exceptionally high multiples, valuations in the sector have seemingly returned to normality. A number of larger serial acquirers, previously driving multiples, have started to look elsewhere (largely abroad) for better value opportunities; although demand still remains for good quality stock in the UK. A largely fragmented market, the sector is still attractive to those investors looking to embark on a buy and build strategy. At the opposite end of the market, a long tail of smaller, less financially robust operators continues to drop out of the sector as costs of running the business and recruitment pressures result in their closure. Interest from the real estate angle is helping to drive up valuations on property backed groups, especially those operators with seemingly less price sensitivity, particularly in London and the South East.