Firm’s Investment Strategy

Innervation remains a theme driven investor, driving superior returns from proprietary deal sourcing, with an exclusive focus on education.

Innervation has been investing in the Education sector since 2016. During this seven year period, the Firm has acquired 44 Early Years Settings (ICP Education), built the UK’s leading Early Years apprenticeship training provider (ICP Training, Eden), acquired seven SEND Schools (Melrose) and provided funding for two green field SEND schools, the first of which opened in 2023 (Melrose).

To execute this strategy Innervation provides more than just capital. The Firm works closely with our operating partners and special advisors, including leading educationalists, to craft a plan which realises the full potential of the business over the long term. We measure this impact in both social and financial terms; looking to maximise returns in terms of educational outcomes and return on investment.

Innervation has a track record of identifying “underserved” markets where dislocations in demand & supply create investment opportunities for the social entrepreneurs we are in partnership with. It is these entrepreneurs that unlock the value, scale the solution and solve the problems. Innervation aspires to be their investor of choice.

Innervation currently deploys capital in 3 themes to maximise returns: 

Theme One: Invest in “upskilling” and expanding early years childcare capacity for its high impact potential

Early Years Schools (“EYS”) have a workforce of 250,000 in over 15,000 Settings with staff churn of 15% per annum. This underpins a requirement for 25,000 annual apprenticeship starts to maintain capacity and comply with mandatory staffing ratios. 

Market research shows 78% of EYS Settings utilise apprenticeships: 65% of these do so to assist with staff recruitment & 42% with retention. In a tight labour market, this explains why 96% of employers expect to continue using apprenticeships & half of the Settings expect to increase their utilisation of this increasingly essential service. 

Eden Training Solutions (“Eden”) is one of only 6 expert apprenticeship providers in the private sector appointed to assist DfE with meeting the challenges to scale apprenticeships.

Eden currently trains c.5% of all EYS apprentice achievers and delivers the highest Qualification Achievement Rate (“QAR”) in EYS apprenticeships, 75% of whom are awarded a distinction.

The extension of 1,140 hours p.a of EYS entitlement funding to an estimated 50% of all families with 1-2 year olds is expected by Nesta, an independent Think Tank, to increase demand for Early Years provision by 46% for 1 year olds & 33% for 2 year olds. The impact on staffing is expected to be a skills gap of 25,000 by 2027.  

The Firm’s value creation strategy is to scale Eden to c. 2,000 active learners by 2025;  the additional educators required by our existing clients to meet the expected skills gap could increase starts by a further 500 p.a.

Theme Two: Invest in “underserved markets” for superior returns and scalability 

The Firm launched its first Early Years platform, ICP Nurseries (now called Bright Stars Nurseries), in 2016. Innervation identified the “underserved” segment as founders looking for an exit. At that time there were less than a dozen groups with the capital and expertise to consolidate these “mom & pop” operators. Within six years ICP Nurseries were serving 6,000 children in 44 nurseries across England after merging with Cresswell Nurseries  in 2020.  ICP Education immediately became one of the largest nursery operators in England, with a third of nurseries rated Ofsted Outstanding and 98% rated Outstanding or Good. In 2021 ICP Education was also ranked as the 14th Best Place to Work in the UK by Glassdoor, across all categories. The Firm realised its investment in ICP Education in 2022, generating a £100 million gain. This reflected the continuing scarcity value of “bridge-heads” to enter this lucrative market. 

The ROI of investing in early years can be attractive both financially and socially. The first five years of life are the fastest period of human growth and development as 90 percent of a person’s brain development occurs by the age of five. Investing in the early years helps to break the cycle of poverty, address inequality, and boost productivity.

In the U.K. more than a quarter of four-and-five-year-olds (28 per cent) lacked the early communication and literacy skills expected by the end of reception year. The ‘expected level’ includes, for example, a child being able to express themselves clearly and read simple sentences.

icpeducare is the Firm’s most recently launched Early Years platform: Innervation is backing the same proven leadership team it backed at ICP Education & Cresswell Nurseries. The objective is to build one of the UK’s leading EYS consolidation platforms within 3-4  years, delivering 1,600 places, serving 3,000 children. The Firm has committed £8 million to acquire three Settings with c.300 places & over £1 million EBITDA. 

In 2024, the challenge is how to unlock latent “underserved” demand from working families with children under three years old. This age cohort of 1-2 year olds currently constitutes 30% of demand (c.150,000 FTEs), & 75,000 staff. 

The “underserved” segment comprises almost 50% of working households with disposable income below £750 per week. icpeducare has identified that only 30% of families in this mid tertile demographic utilise 20-25 hours of formal childcare per week for 1-2 year olds compared to 60% in the top tertile.

The extension of 1,140 hours p.a of EYS entitlement funding to an estimated 50% of all families with 1-2 year olds is expected to increase demand for Early Years provision by 46% for 1 year olds & 33% for 2 year olds. The increase in funding rates and relaxation of staffing ratios is the inflexion point for the Firm deploying capital. 

Theme 3: Invest in “SEND”, helping the most disadvantaged children in society to realise their full potential & to avoid becoming NEET as an adult 

Innervation is also one of the Co-Founders, & Firm’s CIO is the largest equity investor in one of England’s leading independent Special Educational Needs & Disability providers, backing the same Chief Executive that led ICP Nurseries. The Firm’s strategy is to acquire seven to ten “bridge-heads” or Special Schools serving multiple local authorities & leverage these relationships to open two green field operations per annum in this fragmented market which addresses the higher acuity needs of around 30% of 500,000 children with Education & Health Care Plans.

Growth reflects increasing awareness of mental health issues and recognition that mainstream schools are unable or unwilling to meet the complex needs of children diagnosed with mental health challenges. Autistic spectrum disorder remains the most common type of neurodivergent behaviour.

Some LAs have seen their High Needs Block increase by nearly 90% since 2019; others have had a much lower increase of around 40%. That’s mostly down to the arcane methods that the DfE uses to calculate and allocate high-needs funding.

The cumulative local authority High Needs budget deficit is estimated to be around £2.3bn and is increasing daily. The latest estimates conclude that the cumulative local authority High Needs budget deficit across England will be around £3.6bn by March 2025.

This is reinforced by the number of local authorities that are working with the DfE through its intervention and support programmes – The Safety Valve Programme (34 LAs) and the Delivering Better Value in SEND programme (55 LAs). These programmes have been introduced to assist those local authorities with the greatest deficits.

Scalability

Innervation has the capacity to invest equity from £1 million to £20 million and has the risk appetite & patience to scale platforms from start-up to £25 million EBITDA, providing both capital and operating expertise, over a 5-10 year holding period.

“We buy complexity & sell simplicity”