Swiss private equity firm Partners Group’s gambit in bringing the NYSE IPO of KinderCare Learning just weeks before a US presidential election delivered a decent – if unspectacular – result on Wednesday.
The childcare provider's all-primary offering priced near the bottom of the marketing range for proceeds of US$576m as investors found multiple reasons to push back on the valuation, not least the uncertainty around whether big changes might be in store for the industry under the next administration.
A syndicate led by Goldman Sachs, Morgan Stanley, Barclays and JP Morgan on Tuesday found takers for 24m KinderCare shares at US$24 versus a US$23–$27 marketing range. The shares popped 12.5% in their opening trade on Wednesday before closing up 8.9% at US$26.13. Thursday saw another decent rise to US$28.04, a solid 16.8% gain over two days.
The order book was multiple times covered with the top 10 accounts taking 55% of the shares and the top 25 getting 85%, a syndicate banker said.
KinderCare secured an enterprise value of US$3.6bn, more than double the US$1.5bn that Partners paid for the business in 2015.
Proceeds will be used mostly to cut net debt to around US$950m versus the company's 2023 adjusted Ebitda of US$266.4m. Partners' stake in KinderCare has been diluted to 71.2% from 90.1%, and will drop to 69% with the exercise of the greenshoe.
The IPO valued KinderCare at a trailing adjusted Ebitda multiple of about 13, a big discount to the above 20 multiple of Bright Horizons Family Solutions.
Subsidies
Investors proved cautious about paying up for the company given the large sponsor overhang, the expiration of some government subsidies this year that account for a third of KinderCare's revenue, uncertainty around how the US presidential election will affect the industry and doubts about organic growth given attendance rates at its childcare centres are already back above pre-Covid levels.
"A lot of [the pushback] had to do with the fact this is a tough business that will still be 70% owned by a private equity firm that will probably be looking to exit over the next two to three years," one hedge fund manager said.
"The space has been growing over the past few years as people have gone back to the office from Covid. Maybe that lasts a little while longer. But really the only way to grow this type of business is by opening new centres, because there’s only so many kids you can fit in [each] facility before you’re maxed out."
Bipartisan support
KinderCare's IPO filing detailed the risks associated with changes to federal and state funding and universal childcare benefit programmes but also highlighted long-term bipartisan support for growing childcare funding.
CEO Paul Thompson told investors on the roadshow that the company stands to benefit from the significant supply shortage of childcare places across the US.
This could be exacerbated by the expiry of pandemic-related stimulus at the end of the year that may lead to closures of centres run by smaller players over the next 18 months, a prospect Thompson touted as a “significant opportunity for sustained growth”.
Democrat presidential candidate Kamala Harris plans to cap childcare costs at 7% of working families’ income and promised a more generous child tax credit, while her Republican opponent Donald Trump has talked more generally about funding increased childcare with revenue from tariffs on Chinese imports.
The IPO had already been long delayed given KinderCare first filed to go public in 2021 before withdrawing its filing in July last year and then refiling confidentially in July this year.
The offering also marked the long-awaited return of the company to public markets after more than 30 years in the hands of a string of private owners, including KKR in the late 1990s/early 2000s, then a stint as part of Michael Milken's Knowledge Universe before the Partners buyout.