Home Private Equity As Private Equity’s Role in Child Care Increases, Concerns Arise

As Private Equity’s Role in Child Care Increases, Concerns Arise

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When most people think of a lucrative industry, they don’t think of child care in the United States. And there’s good reason for that: there’s no shortage of news reports explaining that child care is “an industry on the brink” with providers struggling to make enough money to keep the bills paid and parents unable to pay more than they’re already spending. It’s difficult to recruit staff to work in the child care industry since they can often make a higher wage working at food service and retail jobs. Treasury Secretary Janet Yellen succinctly summed up the state of child care when, three years ago, she described the industry as “a textbook example of a broken market.”

Given the tough financial situation facing child care, it might come as a surprise to learn that private equity firms are increasingly moving into the child care market. In fact, private equity firms now own 8 of the 11 largest U.S. child care chains by capacity and control between 10 and 12 percent of the licensed child care market. Private equity firms have grown substantially since the 1980s and are now involved in industries as varied as nursing homes, fisheries, autism services, and jails. Unlike venture capitalists who provide cash to promising startups in exchange for an equity stake, private equity firms temporarily acquire a company for a relatively short period of time with the aim of restructuring it before reselling the company at a profit.

As they move into the underfunded child care industry, these firms look to make money by largely serving affluent families and focusing on maximizing enrollment and minimizing operational costs. Minimizing costs often means resisting unionization efforts among staff who receive the low pay that is typical of the industry and keeping staff levels as lean as possible. In a new long-form article for Early Learning Nation, Elliot Haspel, a well-known child care expert, argues that the growing influence of private equity in child care is worth paying attention to because it could lead to negative impacts on the quality, accessibility, and affordability of care.

“We’re at a really interesting hinge point. It’s hard for me to predict because there are multiple kinds of paths we could go down.” That’s how Haspel summed up the importance of the current moment in a recent webinar timed to coincide with the release of his article. In Haspel’s view, the rise of private equity in child care represents a real threat to achieving comprehensive child care legislation, such as the Build Back Better Act.

That particular legislation and its ultimate demise serves as a cautionary tale of the political power of private equity firms. According to the New York Times, the main lobbying arm of the chain child care industry publicly supported the bill, but expressed skepticism in private meetings with lawmakers due to concerns that it would phase benefits in too quickly for higher income families, potentially reducing revenue for the chains. In a filing with the U.S. Securities and Exchange Commission, KinderCare, the nation’s largest provider of private child care, noted that expanded government child care benefits could lessen demand and reduce their ability to raise tuition.

Haspel emphasizes that the typical private equity playbook of extracting profit while loading companies with debt raises the risk of collapse. He points to the infamous example of Australia’s ABC Learning, the world’s largest child care provider that owned over 2,200 centers by 2008. It turns out that a large amount of debt was fueling the company’s fast pace of expansion. When the bubble finally burst, the Australian government was left to pick up the pieces and provide a large bailout to prevent thousands of families from losing their child care overnight. It’s difficult to assess whether U.S. chains might face similar risks of collapse due to a lack of transparency concerning their finances.

As the role of private equity in child care gains more attention, there are growing calls to institute guardrails to rein in investor-backed chains. A bill recently passed by the Massachusetts Senate could serve as a template for other states. That bill significantly expands the state’s investment in child care, but also takes steps to prevent private equity-owned providers from quickly expanding throughout the state. Specifically, the bill ensures that no for-profit provider operating more than 10 programs throughout the state can consume more than one percent of the $475 million in proposed grants.

Vermont and New Jersey are two other states that have instituted guardrails. A Vermont law passed last year includes over $120 million in permanent funding for the child care sector while limiting tuition increases to no more than 1.5 times the national average increase in compensation for providers of educational services. New Jersey technically allows for-profit providers to participate in its state-funded pre-K system but imposes budgetary requirements around educator compensation and limits programs to a 2.5 percent profit margin.

During the webinar, Haspel succinctly summed up why the rise of private equity in child care is a trend worth paying attention to: “If we start to have a system of haves and have nots in this country, of child care rich and the child care poor, that is enormously disturbing to a future where all children and families have the opportunity to flourish.” The years to come will be pivotal in determining whether Congress and state legislatures take steps to rein in private equity’s expansion into a sector that should be focused on the well-being of children and staff rather than profit.

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