Private-Equity’s Growth in Child Care Chains Imperils Access for Many Families, Research Finds - Early Learning Nation

Private-Equity’s Growth in Child Care Chains Imperils Access for Many Families, Research Finds

The number of investor-backed, for-profit child care chains in the United States has been growing in recent years, creating additional strains on the industry—and families—that go beyond the negative effects of the COVID-19 pandemic, according to a new research brief.

If it continues unabated, the trend would make it more difficult for families to access affordable child care across the country, writes Elliot Haspel, author of the book “Crawling Behind: America’s Child Care Crisis and How to Fix It” and director of climate and young children at Capita, an independent, nonpartisan think-tank with a global focus on children and families.

“As most child care programs scrape to survive while raising parent fees only as a last resort, investor-backed chains make between a 15 and 20 percent profit while regularly hiking fees for parents,” Haspel writes. “These chains have increasing political clout. And they have proven themselves unwilling to support a child care system that would work for everyone: one that lowers parent fees, increases child care educator wages and puts people over undue profits.”

Haspel defines “investor-backed” as for-profit companies owned by a private-equity firm or publicly traded on the stock market.

The research brief, titled “Toddlers and Investors Aren’t Playmates: The Threat of Private Equity in Child Care,” finds that nine of the top 11 for-profit chains by capacity serve more than 750,000 children a day every day and hold a market share of approximately 10 percent—and it’s growing. While the child care sector was hit hard by the COVID-19 pandemic, investor-backed chains grew by 8 percent, not by adding new capacity but by acquiring existing chains and independent programs.

The research identified five major issues with investor-backed child care chains:

  • a lower quality of care, on average, than nonprofit or independent programs;
  • a greater risk of collapse, in the event of an economic downturn, due to their highly leveraged nature;
  • the loss of independent, community-based programs;
  • the contribution to income and geographic inequality, as investor-backed programs tend to be located in more affluent neighborhoods and serve higher-income children than rural or low-income urban areas; and
  • hindering public support for a child care system that works for all families.

“This is the same story we’ve seen when private equity meddles in nursing homes, institutions of higher education, and K-12 schools,” the brief says. “Investor-backed human services inevitably end up making trade-offs that put profits over people.”

A Range of Possible Solutions

To address these issues, Haspel suggests a variety of measures, including a requirement for public financial disclosure from investor-backed child care chains and prioritizing independent, nonprofit programs for public funding. Other proposed regulatory measures range from capping fees and profits for publicly funded programs to an outright ban on investor-backed child care programs and divestment for existing companies.

“I think the best first step would be Congressional hearings,” Haspel said in an interview conducted via e-mail. “There is so much we just don’t know about these investor-backed chains: how are their finances and debt structured, how over-leveraged are they, how exactly does their fee structure relate to educator compensation vs. profit-making, and so on.”

Haspel said there’s a solid precedent for legislative involvement. “In 2010 and 2011, the Senate held hearings on the for-profit higher education sector, and those hearings plus the document requests that came along with them helped shine a light and lay the groundwork for policy reforms. Similarly, Congress has gotten involved in looking into the role of private equity in nursing homes.”

Haspel said he has been aware for some time of the growing influence of private equity in child care. “But I was also taken aback that no one in the U.S. ever seemed to talk about the investor-backed for-profit chains—like some tacit agreement we would just let them be because we needed their slots,” he added.

The role of private equity in the child care industry prompted Haspel to write an article for The New Republic in October, he said. Two months later, The New York Times “published their investigation finding that many of the chains had actively been working behind the scenes to sabotage the Build Back Better Act,” Haspel added. “I wanted to write up the brief so that policymakers taking a deeper look at this issue had all the information and sources at their fingertips.”

From his end, Haspel said he’s been hearing from professionals in the field about the negative impacts the pursuit of profit has had on child care—and not just in the United States.

“The rise of private equity in child care is a major trend in nearly every other country with a primarily market-based system—which should tell us something,” he said. “Just in the past couple of weeks, there have been articles out of the UK and New Zealand on exactly this issue, and the role of private equity is a sticking point in negotiations in The Netherlands about their child care reforms.”

A Flawed Business Model?

Haspel said there’s evidence that the quality of child care, on average, is lower at large for-profit chains due to their tendency to cut corners. “But I’ll be the first to admit we need to learn a lot more; these chains are very opaque,” he added.

“For families, the evidence is much clearer: These investor-backed chains are taking them to the cleaners,” Haspel said, citing a New York Times article that found investor-backed child care chains posted annual profits of 15 to 20 percent. “Imagine if they were OK with a 3 to 5 percent margin, still plenty healthy for sustained operations. They would be able to lower prices overnight! Or, they could use that money to pay their educators well and increase retention and quality.

“But they won’t, of course, because that’s their entire business model: making enough profit to be able to service their debt and return a bunch of money to their rich investors,” Haspel added. “And that’s what I can’t get past: How will these chains ever be part of the solution, if that solution involves affordable parent fees, well-paid educators and limits on how much public money can line the pockets of investors?”

Yet in the face of a for-profit industry that’s growing in size and political power, Haspel said there are “absolutely” signs of hope on the horizon.

“There is more attention being paid to investor-backed child care chains now than basically at any time since their rise began,” he wrote. “I am hopeful that policymakers will realize this is the time to start scrutinizing them, so that as efforts continue to build a child care system that works for everyone, private equity isn’t standing by to reap profits off the back of the public or just standing in the way.”

Bruno J. Navarro is a writer, editor and photographer who has covered business, technology, courts and education. His work has appeared in CNBC, Women's Wear Daily, NBC News, The Associated Press, Nylon and The Arizona Republic. Originally from Queens, New York, he currently lives in New Jersey.

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