The Perils of Private Equity Coming to Child Care
More government funding for child care is good, but history shows that private equity interest isn't far behind.
Hi! First, a quick hello and welcome to new readers who came from ’s , which featured my guest post interview with Jess Calarco. Expect to see a guest post here from Katherine this summer too. Want to know more about and why I’ve gotten into child care policy reporting? Read here.
Also, a final reminder about our event this Thursday, July 11th, on the future of child care reporting. I’m joined by some amazing journalists for this conversation - Chabelli Carrazana from the 19th, Jackie Mader from The Hechinger Report, Leslie Gray Street from the Baltimore Banner, and Mark Swartz from Early Learning Nation.
It’s free to attend, just register here.
Now back to child care…
Private Equity’s Growing Interest in Child Care
Until recently, I hadn’t had strong opinions about private equity.
I knew private equity only in the basic outlines of what it could be: a high paying job. Businesses investing in other businesses. Getting in and getting out quickly. But I knew relatively little about the toll that private equity firms take on their respective industries.
After my colleague Elliot Haspel published a comprehensive report on the dangers of private equity entering the child care industry, it became clear that this wasn't an isolated problem. Setting aside any of the other risks associated with private equity, having private equity take a substantial stake in the child care industry carries an unusually large risk with potential devastating effects.
Here is why: child care is already a broken industry that can’t be fixed by the market. For a select few, this is a workable system in which kids are enrolled in high quality child care of a families’ choosing. But for many, child care is unaffordable. The Department of Health and Human Services says that a family should pay no more than 7 percent of their income on child care, and yet many families pay far more than that. And providers are paid very little, an average of about $13 an hour, which is not a livable wage in this country.
Also, as Elliot writes, child care is about taking care of children, something which should be more about education and less about profit. To quote Elizabeth Leiwant, director of Government Relations at Neighborhood Villages, from Elliot’s report:
“How would you feel if I told you that, say, Morgan Stanley owned your child’s elementary school? It would just seem ludicrous to anyone that these companies and investment firms are making decisions about how your child is educated. And yet people either don’t know that’s going on in early care and education, or they somehow feel comfortable about it, because they don’t associate early education with education in the same way that they do with K-12.”
So why would private equity want to get into an industry like child care? And how could they extract profits from an already slim-margin industry?
It’s a well-worn playbook and they’ve already started. This past week, I attended an all-day conference in Washington D.C. to mark the release of a report by the National Women’s Law Center and Open Markets Institute: “Children Before Profits: Constraining Private Equity Profiteering to Advance Child Care as a Public Good.”
“The report isn’t anti-private equity, it’s pro-child care,” said Melissa Boteach, Vice President for Income Security and Child Care/Early Learning at the National Women’s Law Center and one of the authors of the report. Boteach and her co-author, Audrey Stienon from Open Markets Institute, advocate that child care should be understood as a public good that’s in need of sustained government investment. The report lays out a vision of how a robust child care system would provide universal access to high quality child care with appropriately compensated providers. The goal, says Boteach, is that if private equity firms, or other outside investors, are going to enter the childcare market, they should do so in a way that upholds this vision.
The timing of this report coincides with several states—including New Mexico, Vermont and Minnesota—instituting record levels of government investment in child care. Polling data from the First Five Years Fund also shows strong bipartisan voter support for more child care funding, with 93 percent of voters believing it’s important for working parents of young children to have access to affordable quality child care programs.
But one need only look at the history of private equity firms going after industries with sustained sources of federal funding to be cautious (or anxious) about what may be ahead for a more subsidized model of child care.
At this event, I had the privilege of sitting next to Eileen Applebaum, co-director at the Center for Economic and Policy Research and an expert on private equity, and also something of a legend among people who study private equity’s effects on industries.
Applebaum has studied and tracked the ways that private equity firms began investing in a substantial share of hospice care services. Yes, hospice - the palliative care treatments we offer people at the end of their lives. Much of hospice care is funded by Medicare, which pays a fixed amount to the hospice agency for each day an eligible Medicare beneficiary is enrolled, regardless of whether the patient receives actual services on a particular day.
In one of her examples, she pointed to the wide discrepancies in profits and patient care for hospice services: profit margins for a nonprofit hospice provider were around 4-5 percent, and for those owned by private equity firms, it was 19 percent. NINETEEN! One major difference was how the two types of companies re-invested their profits. Nonprofits are more likely to use funds to invest in staffing and the business, while private equity uses debt-financed acquisitions to restructure these companies to maximize their profit margins, and try to sell them to the highest bidder within three to five years.
In the case of hospice, Applebaum also found that private equity hospice providers have higher rates of neglect, low staffing and are more likely to pass on the higher costs to patients and families.
But bringing this back to child care. Child care is in a unique position of being primarily a small business industry, with low profit margins yet with high demand because it is a necessity for many Americans to go to work and for the economy to function. “A textbook example of a broken market” is how Treasury Secretary Janet Yellin described child care in the United States. Yet if a child care center is forced to declare bankruptcy, the private equity company may still see a high return on the investment, even though the individual businesses may have shuttered, and the communities that rely on such child care centers may no longer have a viable option.
The concerns about private equity’s influence are well founded. A 2019 study by researchers at Harvard Business School and the University of Chicago found that private equity takeovers result in significant job losses. These firms reduce wages, benefits and staffing at firms they acquire – with devastating consequences to thousands of workers, their families and their entire communities. Private equity funds also face few financial or legal consequences should their tactics to maximize profits fail. And for a business like child care, primed to receive a possible influx of federal and state investment, private equity’s interest in the sector is likely to increase.
Looking Toward the Positive
It’s not all doom and gloom. And it wouldn’t be Solutions Journalism Reporting if I didn’t share some answers on how things can get better.
Here are a few positive things to take away from this:
—> The federal government is paying attention. One of the speakers at the event was Rebecca Slaughter, a Commissioner for the Federal Trade Commission, the independent government agency that protects the public from deceptive or unfair business practices and from unfair methods of competition. She told the group, in no uncertain terms, to bring such examples of poor business or anti-competitive conduct to the attention of the FTC. “I can’t solve a problem if I don’t know about it,” she said.
—> Journalists and researchers are paying attention. Hats off to Elliot Haspel, Melissa Boteach, Audrey Stienon, author Brendan Ballou, whose book “Plunder: Private Equity’s Plan to Pillage America” is heavily referenced in Elliot’s report (and I just got my copy) and to the OG Eileen Applebaum for their work and reporting on the role private equity can play in child care. Expect to see more ink in this Substack devoted to this topic in the coming months too.
—> Private equity is interested in child care because more funding is flowing to child care. Let’s not take our eye off the ball that the goal here is a more supported, sustainable child care system. We may still need guardrails in place for outside investment, but the fact that government funding may be increasing to the child care industry that has been long under-funded is still a good thing.
Nearly every other developed country invests more in the care of young kids than we do. But calls for change take time, and understanding the landscape and its challenges takes more than bullet points. Supporting (and reading) policy journalism means a lot, and if we want to see larger changes in the future, then we need to find ways to do more of it.
Great reporting and what a potential nightmare. We're already seeing how elderly care is robbing people of their hard-earned savings and providing minimal care in return. It's outrageous to imagine a large-scale takeover of childcare. Thanks for bringing attention to it and keep up the hard work!