Private Equity is Coming for Child Care
Are we ready? Not exactly.
Thanks to everyone who responded/replied to my call out for child care reporting grants last week. These are rolling admissions so I encourage anyone who is interested in reporting on child care to reach out with a pitch or an idea. If we want to shift the narratives surrounding care, then we need to start changing the way we read and report on it. For more details on the child care reporting grants - click here.
And a special shout out to , , , and who shared the details of the child care reporting grants in their Substack channels. Thank you!
My colleague Elliot Haspel recently published an article on how private equity and shareholders are reshaping child care in America.
Let that sink in. Child care - taking care of our youngest and most vulnerable and impressionable citizens - has been deemed a market that private equity is interested in entering.
But why would they even want to? Child care centers can barely stay open and they pay their staff low wages to compensate. There is a method to the madness though - private equity has found a way to make money. As Elliot says:
“What I found is there’s a playbook that’s worked in many other sectors for private equity, including nursing homes, autism services and prison services. The playbook shows five main ways that these companies are making enough money to return the profit private equity firms are looking for, which according to the New York Times can be up to 15% to 20% profit margins.”
I’ve long made it a point of reading Elliot’s reporting on child care, and this very long and deeply reported piece is no exception. If you have the time and attention span, pour a cup of coffee and go through the long read.
But for everyone else, here’s a condensed Q+A that I’ve curated for Substack readers. (If you’d like to read a longer Q+A between Elliot and me, head over to
)
Rebecca: Could you tell us a bit about how and why you decided to pursue this topic on child care, private equity, and what your process has been?
Elliot: Back in 2022 when many of the pandemic effects on the child care system were still raging acutely, I started to see a couple of headlines pop up about some of the large corporate chains acquiring sites continuing to grow. I sort of figured in my mind this question of well, there always seems to be a 2 tier system where the chains are having a different experience than everyone else. And I started looking into it and when you start looking into it, you start to realize interesting things. 8 of the 11 largest chains by capacity are owned by private equity firms. And a 9th used to be run by a private equity firm and is now publicly traded on the stock market. And that's a fascinating feature of our shop and they felt like almost no one was really talking about it.
So I published a basic policy brief with some information about that. And then the next month in December, 2022, the New York Times came out with a pretty big article looking at private equity and child care and also revealing for the 1st time some information about the political activity of those chains when it came to the efforts to improve the child care system.
But there were more questions here. How were these chains making money? What does this mean for parents, for educators and for kids on the ground in a very real way?
It took me about 6 months to research and write it with a combination of using all of my networks to try to identify folks who were current or former employees and were willing to speak, looking at financial records, legal filings, and just compiling all of that.
RG: How can private equity firms make a lot of profit in the short term in industries that are not usually considered very profitable like child care specifically?
Elliot: There's a playbook that’s worked in many other sectors for private equity, including nursing homes, autism services, and prison services. The playbook shows five main ways that these companies are making enough money to return the profit private equity firms are looking for, which according to the New York Times can be up to 15% to 20% profit margins.”
The first one is targeting an affluent clientele. These chains tend to want to serve middle, upper-middle, and truly affluent families and then they charge them a lot.
Second, there is a real push to maximize enrollment because in this country we treat child care much more like a private market good, right? So the number of enrolled families you have is the amount of revenue - that's the multiplier to the amount of revenue that you're getting. So there’s lots of pressure to always keep enrollment as high as possible.
And you can lower your operational costs as much as possible. These chains don't tend to pay their employees considerably better than the ones that aren't making this kind of profit.
I found in some cases teachers were asked to basically reduce the number of sheets of paper per day they were giving kids, and chains were shifting daily cleaning responsibilities from outside companies to teachers.
A 3rd way is you can engage with institutions: corporations, public, local and state governments, and universities and colleges are all clients that tend to work with these large chains when they're providing onsite child care for their employees.
A 4th way you can make money is real estate. So, many child care programs, one of the best financial assets they have is that they own their building. And the common private equity tactic is to have the child care center sell off their property. But the proceeds of that sale do not generally go back to the site. They generally go up to the private equity firm. But now the site has to lease back the property previously owned. So it now has a line of debt that it has to pay and that can be more than a mortgage.
The 5th way which is really constrained just to the franchise chains, are the ones that require franchise fees and royalties.
So when you combine this basket of different profit making strategies, you can start to see, okay, there actually is a path to making profit in child care. But that's not one that tends to be pursued by independent community-based programs.
RG: Why does our country treat elementary and secondary education very differently than early education?
Elliot: We have a history in this country of treating child care as a market good, especially since the 1970s. For-profit child care started to kick up in the late 1960s when we started to see an increasing number of middle class white mothers entering the workforce. Previously there had always been some mothers who had worked but predominantly those had been mothers of color or poor mothers. In 1971, you know, Richard Nixon vetoed the Comprehensive Child Development Act to create a nationally funded locally run system of child care programs.
But there is a massive need for child care. If you look at the graph of women's labor force participation starting in the late sixties and going through the 1970s and 1980s it's almost a straight line up. The United States decided to say, we're going to push this into the market. We're not going to invest enough public money to create a functional publicly funded system. We're still dealing with that legacy today.
RG: You mentioned as private equity gains a larger share of the child care industry their political influence will grow. Does that create an inherent conflict of interest?
Elliot: If we put in hundreds of billions of dollars to create a publicly funded child care system where parent fees are significantly reduced -- if not making it entirely free for everyone like our schools -- but the tradeoff is that there are conditions that restrict profit, what will private equity-backed chains do?
Build Back Better did have mandatory caps on parent fees and living wage minimums for educators. And according to the New York Times, we saw the Early Care and Education Consortium, an advocacy and lobbying group that represents many of the large chains, working behind the scenes with Senator Manchin to lobby against the bill.
And then the month after Senator Manchin kills Build Back Better, executives for many of these chains provided donations to his campaign PAC.
So the concern here is economic power often equals political power and private equity in particular is enormously powerful politically. I have a quote in there from Brendan Ballou, who's the former US Special Counsel for Private Equity at the Department of Justice, that “Congress works for few constituencies harder than they work for private equity.”
RG: If you and I revisit this conversation in a few years, there would be different expectations on how child care should be treated and therefore what role public equity would play.
Elliot: 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. Most parents don't know that a private equity firm owns their child care provider.
I do think there's a question about what decisions policy makers make because if there are no guardrails put up and there's more public money flowing, we are going to start to see increasing capture by private equity firms.
We are at a point now where private equity and investors together have captured about 10 to 12% of the licensed child care market. That's large but not dominant yet. If that gets up over the next couple of years, to 20 or 30%, it's going to be incredibly difficult to do anything.
Maybe it's naive of me to say in 2024 America, but I don't think this needs to be a partisan issue. I don't think anyone in red states, blue states, small towns, large cities, are going to be comfortable when they start getting really deep into the implications of having private equity firms making decisions about what's going on in programs that serve infants and toddlers. That’s the first step - we need to be able to talk about this with each other.
To read the full Q+A with Elliot and me, head over to .
Video from the webinar is here.