Private Equity Is Coming for Child Care. What Does That Mean? A Q+A with Elliot Haspel on How Private Equity and Shareholders Are Reshaping American Child Care

I’ve had the privilege of working with Elliot Haspel and reading his work on child care since I began reporting on this topic in earnest, nearly four years ago. There are few reporters on this issue that understand the nuances and complexities surrounding the child care economy as Elliot does, and he also brings a deep level of compassion in shaping his opinions on how to improve the care space – both for the families that rely on care and the workers who deliver it.

So when Elliot approached me about the deep-dive investigative piece he was working on regarding the role private equity plays in shaping the child care industry, I knew he was on to something. What follows is a deeply reported, thoroughly investigated and meticulously fact-checked piece which ran on Early Learning Nation in April.

To follow up, Elliot and I recently conducted a fireside chat webinar, again hosted by Early Learning Nation, in which he had a chance to explain his findings and outline his vision for a potential way forward.

What follows is a condensed and edited version of our Q+A.

Rebecca Gale: Elliot, many of us know that you are a prolific writer, but a piece of investigative journalism like this is different from your normal byline articles. Could you tell us a bit about how and why you decided to pursue this topic on child care and private equity, and what your process has been to conduct such research and digging, and the sense of fact checking for such a piece?

Elliot Haspel: 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 and 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 when you start looking into it, you start to realize interesting things. Eight of the 11 largest chains by capacity are owned by private equity firms. And a ninth used to be run by a private equity firm and is now publicly traded on the stock market. And that’s a fascinating feature that almost no one was really talking about.

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 first 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 six months to research and write this piece for Early Learning Nation, with a combination of using all my networks to try to identify folks who were current or former employees of private equity-owned companies and were willing to speak, looking at financial records, legal filings and just compiling all of that.

We engaged an independent experienced fact checker to vet it and an editor who had experience doing investigative pieces like this.

We really took this through a lot of different iterations to make sure that what we finally published was something that we feel proud of and can stand behind.

Gale: One thing I admired about your piece is that it included a bit of something I called private equity 101, explaining how these firms work and how they can make a lot of profit in the short term in industries that are not usually considered very profitable, like child care specifically. And yet they do make money. One of the lines that stuck out to me is that private equity firms, and I’m quoting this: “don’t need to serve the whole market. They only need to serve the profitable parts of the market.” Can you walk us through what that looks like?

Haspel: The number one question I get when I talk about this is: why is private equity even interested in child care? All we hear about is how financially difficult child care is as a sector. Programs can barely keep the lights on and educators are getting paid next to nothing. It’s incredibly expensive for parents. So, who is possibly making money off this?

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.

The first one is targeting an affluent clientele. These chains tend to want to serve middle, upper-middle and truly affluent families, 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. 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 third 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 fourth way to make money is real estate. For many child care programs, one of the best financial assets they have is owning 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 so now the site must lease back the property previously owned. The center now has a line of debt that it must pay, which can be more than a mortgage.

The fifth 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.

Gale: One quote from Elizabeth Leiwant from Neighborhood Villages asks, “how would you feel if I told you that Morgan Stanley owns your child’s elementary school?” And when I read this, I actually laughed out loud because we have this expectation in our country that elementary school is not up for profit sharing. So why do you think elementary and secondary education is treated very differently than early education?

Haspel: 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 worked but predominantly those had been mothers of color or poor mothers. In 1971, you know, Richard Nixon vetoed the Comprehensive Child Development Act that would have created 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, going through the 1970s and 1980s it’s almost a straight line up. So, you can understand how an entrepreneur—someone looking to make money—would be like ‘sure, I’m going to start offering some sort of for-profit child care’ because at that moment unlike other countries, 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. So, it is a real discontinuity when you think about all the reasons we have public schools, right?

Gale: You mentioned that as private equity gains a larger share of the child care industry, their political influence will grow. One example you gave was the opposition to Build Back Better by the Early Care and Education Consortium (ECEC). How do you see the role of such political interests evolving as private equity gains a stronger foothold in the child care industry?

Haspel: Yeah, absolutely. I think the broader point you’re getting at is: is there an inherent conflict of interest? 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 public 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.

Also, we recently saw the Massachusetts Senate passing a bill that involves quite a lot of public money—$475 million a year in grants to help child care programs—to keep their operations going… and pay their staff better. But they put some guardrails in place. They say, if you have more than 10 sites in Massachusetts, you must agree to certain conditions that include things like accepting a reasonable number of children who are on subsidy, which is a proxy for lower income children. You must agree to use a certain percentage of the grants to pay your educators better and to follow a wage ladder that’s going to be put in place. You must agree to a certain number of financial disclosures with all strings attached, right?

We found that ECEC quietly tried to get those particular provisions stripped out. They sent a letter to the chair and vice chair of the committee asking them to amend the provisions that would have targeted the larger chains.

The concern here is that economic power often equals political power, and private equity is enormously powerful politically. I have a quote in there from Brendan Ballou, who’s the former U.S. Special Counsel for Private Equity at the Department of Justice, that “Congress works for few constituencies harder than they work for private equity.”

Gale: You mentioned that private equity groups are focused on expanding child care for middle- and upper-class families because these families can theoretically pay more. One of the solutions that you’ve discussed is increasing the subsidy rates.  Some states are already doing this through the pandemic era funding they receive for child care. Can you walk us through how increasing the subsidy rates for child care providers changes the calculus?

Haspel: One thing that is clear from private equity’s work in other sectors is that they really love a steady source of government money. There is a reason private equity firms own most of the companies that deal with prison food and prison phone calls—they get money for those sorts of things. It’s the same reason they want to be in health care— there’s Medicare and Medicaid dollars available.

Public money is a reliable, predictable source of money. In child care, the subsidy reimbursement rate is set so that the government will pay that program X dollars for each child. In most states and for most of the past several decades, that reimbursement rate has been pretty low.

The target that the federal government sets for states until recently was 75% of market rate. Market rate is based on what people are currently paying, which as we know is actually less than the true cost of care. So, we’re already at an already artificially depressed market rate (75% of that) and many states aren’t even at 75%. And it’s not that much money per child. Compare that to a full-pay parent, right?

As the subsidies start going up and as more places start to receive the true cost of care, I would argue that would likely incentivize some of these chains that are only serving upper- and middle-class families to come down into the subsidy market and start to try to capture those dollars.

Gale: One way that the large chains could help us with that compensation is their ability to provide health insurance and other fringe benefits that many independent and nonprofit programs are unable to offer. Particularly in places where they don’t have programs like paid family leave at the state level, these child care providers can’t afford to do that. In your research has the involvement of larger child care chains meant higher or more stable wages for staff?

Haspel: I’ve not seen substantially higher wages looking from what analysis I can do, including looking at states where they must publish salary ranges. They seem to be about on par with the small independent and nonprofit community-based programs. Many chains will offer benefits, like health insurance, which as you say the others are not able to do.

I want to put a fine point on something because I think these conversations can get a little bit fraught. What I’m talking about in this article is about management and corporate decision making. I am not talking about the front-line educators and directors at these sites. They are working just as hard, under difficult circumstances, as any other child care educator. And then to this point, they’re not actually getting paid significantly more.

So, the compensation package overall might be slightly better in some of these change sites, but one thing we see, which is interesting, is actually the turnover is much, much higher.

There’s a Department of Health and Human Services study using 2019 data and it found that the rates of what they call high turnover, which means 20% or more of the child- facing staff in a program, leaves over the course of a year. It was nearly 50% among the large for-profit chains that they looked at and even among for-profit independence is quite high as well. This is compared to about 30% for the nonprofit and government programs of school-based pre-k, Head Start, things like that.

That is an enormously high turnover rate, which when you think about everything we know about child development and the importance of reliable, consistent, stable caregivers, is not great for the children either.

What that tells me is that a slightly better compensation package is not outweighing some issue going on with working conditions. And it’s causing the educators at these chain sites to turn over at just a really alarmingly high rate.

Gale: There’s a quote from Melissa Boteach at the National Women’s Law Center, where she basically asked: “Do we want private equity and a heavily financialized model focused on short-term profit to be the appropriate model for child care?” Is child care really a public good or is it up to individuals? 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.

Haspel: 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.