Australia’s childcare industry is thriving, with revenue expected to reach $17.2 billion by 2028-29, according to market researcher IBISWorld, driven by government support and extended attendance hours in 2023. Competition for prime locations has caused childcare location rents to surge by 47% in the last decade to meet growing demand for quality spots.

The current available childcare facilities are, however, insufficient to meet the growing demand in Australia. This shortage has been worsened by increasing living costs and the pandemic, leading to a significant increase in the number of families in need of childcare services.

Another childcare provider is gearing up to capitalise on the demand and significantly expand its operations, securing funding through an upcoming IPO. Nido Education (proposed ASX: NDO) is set to float on the ASX on 16 October 2023, raising $99.2 million at an issue price of $1 per share. 

Nido is backed by Alceon Private Equity and led by former Think Childcare boss Mathew Edwards. AustralianSuper is a key investor in the IPO, securing almost 60% of the shares early. The final stage of the IPO was moved up to Tuesday 4 October 2023, involving wealth management clients and high-net-worth individuals.

The issue price implies a valuation of eight times the estimated EBITDA for 2024, excluding the impact of options. Indicative market capitalisation is set at ~ $219.5m. Despite appearing ambitious, there was strong demand at these price levels, the AFR attributed this largely due to Edwards’ successful history in the industry.

Canaccord Genuity, MA Financial, and Wilsons Corporate jointly act as lead managers. 

Nido Education, with its centres operating under the name Nido Early School, was previously known as Think Childcare Group. It went private when acquired by fellow childcare provider Busy Bees at $3.20 per share in 2021, having initially hit the ASX at $1 per share in 2014. 

Nido currently operates over 90 childcare centres with support from Alceon Private Equity, with facilities including art studios and consciously designed play spaces. These centres charge an average daily fee of $149 and maintain a utilisation rate of over 80%, resulting in a 20% EBITDA margin. This is expected to generate around $29m in earnings this year, with a total revenue of $98m last year.

Some centres are owned by Nido, while others are owned by Alceon Private Equity, which initially covers the development costs for these centres. Once operational, Nido manages these centres and has the option to purchase them in the future if certain performance criteria are met.

One of the main allocations of the IPO funds is to expand to over 100 centres within the next four to five years. A veteran in the sector, Edwards and his team’s childcare expertise is a key selling point for investors. According to brokers, Edwards has positioned Nido as a premium offering leveraged to sector growth with strong industry tailwinds.

The IPO would give Edwards 50.5% ownership of Nido, with IPO investors holding 45.2%. Edwards’ shares will be held in escrow until Nido’s 2024 full-year results in February 2025, aligning him with IPO forecast commitments and his childcare industry track record.

Nido’s revenue is projected to increase from $88.8m in 2022 to $134.9m in 2023 and further to $171.6m in 2024. EBITDA is anticipated to rise from -$5.7m in 2020 to $45.9m by 2024.

Childcare service revenue has grown at an annual rate of 1.8% over the past five years, including an estimated 2.1% growth in 2022-23, reaching a total of $14.7 billion across 14,000 childcare businesses Australia wide.

A highly regulated nature of the childcare service industry has led to mixed results for fund managers. Previously, Nido and its peers faced challenges during the pandemic, resulting in a loss of $2.7m for the 12 months ending December 2021, compared to a profit of over $11.8m in the previous year.

While Nido’s IPO will be one of the largest on the ASX, it’s not the only childcare business getting ready to go public. Quadrant Private Equity is exploring a potential divestment of its early childhood education business, less than two years after it acquired Affinity Education from rival Sydney-based private equity investor, Anchorage Capital Partners.

Affinity Education is the third-largest early education provider in Australia, with over 200 centres and nearly 5% of the market’s revenue share. The market is fragmented, with the largest provider, Goodstart Early Learning, holding only 9%, and the second-largest being ASX-listed G8 Education. The majority of the industry is small, family-run businesses.