Campaigners are calling for tougher regulation of the childcare market to safeguard taxpayers’ money, as new analysis shows more than £1 in every £5 spent at English nurseries backed by large investment companies ends up as profit.
Jeremy Hunt announced an extra £500m funding in last week’s budget, to help meet his promise of 30 hours a week of free childcare for under-threes by September next year – which he hopes will bring 60,000 parents back to work.
With public funding for the sector set to surge, research by the Guardian and the Joseph Rowntree Foundation (JRF) in collaboration with investigative accounting firm Trinava Consulting reveals that private chains are poised to make bumper profits, even as small providers struggle to survive.
The analysis shows nurseries backed by investment companies – including private equity firms, asset managers and international pension funds – reported double the profits of other private providers and seven times those of non-profits.
JRF said the findings underlined the need for stricter controls on the sector. In a new report, the anti-poverty thinktank calls for “social licensing” of childcare providers. This would demand commitments on workers’ pay and value for money from nursery chains – potentially including a profits cap. Firms in receipt of public funding would also be expected to be financially transparent.
Abby Jitendra, the JRF’s principal policy adviser on care, said: “Our childcare system is a wild west where the biggest providers cash in while others struggle and workers live on poverty pay – pouring billions into it without proper controls is utterly irresponsible.”
The companies backed by private equity or investment firms covered by the analysis – which represent some of England’s largest childcare providers – reported average profits equivalent to 22% of their turnover over the five-year period between 2018 and 2022.
This is twice the 11% reported by other private providers not backed by investment companies, and more than seven times the 3% reported by the non-profit companies analysed.
Profits are not necessarily paid out to shareholders: they can be used to repay debts or reinvested in the business to improve services.
But Stacey Booth, a national organiser of the GMB union, said: “Too many nurseries are run as a business first and education establishment second. We need more regulation – hopefully an incoming Labour government will deliver this.
“Any profits in education and childcare should be invested back into the sector, lifting the wages of workers and ensuring good career pathways. Happy staff equal happy children.”
The analysis shows that the combined debt of England’s 43 largest childcare companies, regardless of ownership, rose dramatically in the same five-year period from £0.6bn in 2018 to £1.13bn in 2022, an 85% rise. The increase has mainly been driven by providers backed by investment firms, who are more willing to take on larger debts in order to finance rapid expansion.
The research also found a debt disparity between providers backed by global investors and those in other for-profit providers. While other private providers had an average debt of 1.3 times their income, debt among those providers backed by investment firms was three times the size of their income during the period 2018 to 2022.
Unison’s head of education, Mike Short, said: “There’s clearly big bucks to be made in childcare, but this is all so wrong. Large investors have muscled in on the sector, siphoning off the profit, piling on the debt and forcing smaller nurseries out. This is extremely bad news for infants, parents and childcare workers.”
Previous Guardian analysis revealed that the number of nurseries backed by investment companies, including private equity firms, pension funds and venture capital, doubled between 2018 and 2022.
Experts worry that lax financial regulation combined with the financial model of these global investors – profit-focused and with high levels of debt – poses a risk to thousands of nurseries that could be vulnerable to collapse.
Vivek Kotecha, director of Trinava Consulting, said companies “are comfortable taking on more debt with the expectation that their income and profitability will grow over time due to more places and rising fees”.
“However, if fees do not rise as expected, places are left unfilled, or cost inflation outstrips fee growth then these larger debts could cause business failure.”
These risks were exposed in the adult social care sector with the collapse of Southern Cross and Four Seasons Health Care, operated by administrators after a previous owner, a private equity firm, accumulated huge debts.
The analysis also found that the cost of servicing debts is higher in providers backed by investment companies, with interest payments and other fees associated with having borrowed money representing a quarter of their income. In comparison, debt repayments represent on average 6% in other for-profit nurseries and 2% in non-profits.
A spokesperson for the Department of Education said: “We’re making the largest ever investment in childcare, worth £8bn per year by 27/28.”
“Parents have choice and flexibility in where they want to use their government funded hours, from private nurseries to childminders, with 96% of providers are rated good or outstanding by Ofsted. Independent research has found no statistically significant difference in Ofsted quality ratings between private and other providers.”
A spokesperson for the British Private Equity and Venture Capital Association, which represents the sector, said: “The private capital industry invests in businesses for the long term to deliver growth, which depends on high standards and delivering for all stakeholders. Private equity firms are active owners of the businesses they back – investing in them and making improvements which support sustainable growth and job creation through high quality provision of services across the UK.”
Bridget Phillipson, the shadow education secretary, said: “Private equity backed nurseries are profiteering while parents are getting hammered with childcare costs soaring above inflation.
“Labour’s expert-led early years review will look carefully at how we drive high and rising standards across a more accessible, affordable childcare system that better supports families.
Methodology
The Guardian and the JRF analysed the annual accounts of the 43 largest childcare providers in England for which relevant information is available, which represent 13% of the nursery places. A further 37 of the top childcare providers were originally included in the analysis but were later excluded because there was not sufficient financial information available to draw meaningful conclusions on their level of debts and profits.
To iron out some of the year-on-year fluctuations we analysed the financial information over a five-year period (2018 to 2022). In consultation with experts, we used a metric of profits and debts relative to the company’s turnover that allows comparison between different companies that have different financing choices, tax treatments, and investment levels.
