The Swerve: K-12’s Age of Transformation
October 22, 2024 BlogOne of the most memorable books I taught as a World History teacher was Stephen Greenblatt’s The Swerve….
Private equity firms have significantly increased their involvement in the early childhood education (ECE) sector in recent years, investing in brick-and-mortar centers, technology providers that sell into the space, and services that can support caring for and educating our nation’s youngest. This influx of interest stems from several factors including, but not limited to:
- Increasingly intense demand for quality childcare and preschool programs
- Growing government investment through state spending and subsidies
- Relatively low start-up costs associated with setting up an ECE center
- High levels of fragmentation in early childhood for-profit centers and EdTech start-ups
These dynamics have made early childhood an increasingly attractive space for investment, notwithstanding perceived risks that inherently follow investments around more vulnerable populations (in this case, children).
In this article, we detail notable themes and trends that are driving ECE opportunities for investors, highlighting transactions in the segment and opining on where further investments will take shape for 2024.
The Rise of For-Profits in a Fragmented Market
State-Level Initiatives Boost ECE Funding
Positive regulatory environments at the state level have driven increased attention to and public funding for ECE. This, in turn, has equipped families with more resources to invest in childcare and has driven additional funding to childcare centers with fewer restrictions on how it’s allocated. (Read about how states are taking specific actions to address the child care crisis). Leading investors have been actively tracking these dynamics; today, nine of the top eleven for-profit chains by capacity – including four of the top five (i.e., KinderCare, Learning Care Group, the Goddard School, and Primrose Schools) – are backed by private equity firms.
For-Profit Chains Gain Market Share
Notwithstanding this consolidated ownership at the largest end of the center-based provider market, the market’s overall fragmentation suggests that PE-backed chains currently represent only ~10% of the childcare market based on number of students served (~750,000 young children daily). However, the expansion of for-profit chains has been notable in recent years. Between 2020 and 2022, amidst the upheaval of COVID-19 across the sector, the larger for-profit center providers grew market share – as measured by number of students served – by 8%, primarily driven by roll-ups of smaller chains and independent programs.
Active M&A Activity Signals Investor Interest
M&A of ECE center providers has been – and continues to be – active in recent years, underscoring PE firms’ interest in the space post-pandemic. In 2024, Avathon Capital sold Big Blue Marble Academy to Leeds Equity Partners, while simultaneously getting back in the market through the acquisition of Magical Beginnings Learning Centers, a network of seven early childhood education centers in the Greater Boston area. Spire Capital-backed O2B Kids, a preschool provider operating across four states, acquired Children of Tomorrow in 2022, and more recently (September 2023) added Bright Start Academy to their portfolio to expand their presence into a fifth state, Missouri. This activity is expected to continue in 2024, as Roark is rumored to be exploring a sale of Primrose Schools in the coming months.
Future Outlook: Continued Investor Interest
The amalgamation of growing availability of state and federal funds, steady financial performance in a relatively fragmented market, and significant unmet demand points to continued investor interest in the ECE provider space for the foreseeable future.
Navigating the landscape: Balancing benefits and perceived risk
At Tyton Partners, we keep a pulse on the needs and experiences of center administrators, parents, and other important stakeholders to assess trends impacting the ECE space. Through our internal research and analysis, it’s clear that PE involvement in early childhood, spanning both centers and companies offering content and technology solutions, aims to leverage several significant dynamics:
Increasing Availability
Investment and funding for private preschools and early childhood education providers most directly expands available supply and potentially ancillary services available to parents and children.
This includes improvements in facilities, better resources for children, and the elimination of months-long waitlists.
Quality Assurance
There is continued and growing demand by states, districts, and parents to ensure ECE experiences are high quality, as measured by accreditation and other evaluatory initiatives and adoption of evidence-based curricula. This emphasis serves to distinguish ECE center providers and establishes demand for products and services that states may mandate and/ or centers can adopt as a signal to parents.
Outcome Emphasis
With states’ continued interest in public Pre-K models to address educational equity for young learners and school readiness, the outcomes orientation, long a hallmark of the K-12 public school system, is being pushed down to the ECE space. As an extension of emphases on center-oriented quality assurance, measures of children’s social-emotional development and early learning “performance”, as well as early intervention tools and services to flag children with risk conditions, are taking hold.
Notwithstanding these significant tailwinds in the ECE space, several real and perceived risks persist that should be assessed by investors considering market opportunities:
- Teacher turnover, already an acute issue across the ECE market, becomes particularly challenging to address amidst ownership changes and cost-cutting measures.
- State regulatory policies can pose obstacles to growth. For example, the Massachusetts Senate recently passed a bill limiting for-profit chains operating more than 10 ECE center sites from consuming more than 15% of the state’s childcare subsidy.
- Education programs that serve potentially vulnerable populations, such as children, can expose private equity investors to headline risk if/when an adverse event occurs at an owned ECE site.
- The fragmentation of the ECE center ecosystem – beyond the largest chain providers – can facilitate an initial level of customer acquisition for companies selling products and services into the market. It can also contribute to challenges in scaling adoption absent clearly defined and well-executed go-to-market approaches.
ECE M&A Trends and Target Markets
As more public and investment funding gets directed toward the ECE landscape and more families gain access to programs and services, investment M&A activity targeting providers that sell into the space continues to be a keen theme among private equity firms. We expect these dynamics will continue to buoy current and pending processes involving ECE businesses across various segments. We have highlighted below illustrative deals and models across four primary segments – technology infrastructure solutions, professional development services, content/ curricular programs and experiences, and age-appropriate children’s products.
Content & Curriculum
brightwheel expanded beyond its center management platform roots with the acquisition of Experience Early Learning – aka “Mother Goose Time” – a notable research-based early learning educational program.
In a similar vein of expansion, media and education publisher Highlights for Children acquired Tinkergarten, which had developed an innovative model for play-based outdoor learning experiences for young children. (Tyton Partners investment banking practice advised Tinkergarten on this transaction.)
Technology Infrastructure
Procare Solutions – the leading ECE provider of cloud-based software for the management of early childhood education centers – was acquired by Roper Technologies for ~$1.75 billion earlier this year.
Avenue’s recent $10 million investment in BridgeCare, a data and technology platform that supports state and local governments around ECE – highlights the growing need for technology infrastructure that extends beyond the centers themselves.
Professional Development
In March 2024, StraighterLine acquired ProSolutions Training, a provider that specializes in professional development for early childhood educators. This deal followed StraighterLine’s 2022 acquisition of ChildCare Education Institute. (Tyton Partners investment banking practice advised CCEI on this transaction.)
Products
The Learning Journey, which specializes in educational, active-play, sensory, electronic, and construction toys was acquired by University Games in December 2023.
As educators, operators, and parents, our team at Tyton Partners recognizes the importance of the ECE sector and possesses strong familiarity with opportunities and risks inherent in the ecosystem. We’ve been on the wrong end of the 12+ month center waitlists, experienced the benefits of high-quality early childhood education programs, and benefited from technologies and services that better connect centers, educators, and families. Investors will continue to play a significant role in shaping the future of the sector, and we are here to guide you in exploring the best-fit opportunities tied to your investment thesis. Reach out to discuss this article.