There was a major shift in the child care landscape in October, but you’d be forgiven for not noticing unless you happen to be a regular consumer of Wall Street news. On Oct. 9, KinderCare, the largest private provider of child care in the country — serving nearly 200,000 children mainly below the age of six — executed an initial public offering (IPO) and is now publicly traded on the stock market.
As someone who has been tracking the impact of large, investor-backed, for-profit child care chains, KinderCare’s move has me pondering a few questions: why did they go public, what can we learn from their IPO-related business disclosures, and what does this all mean for the future of large, for-profit child care chains and the child care system writ large?
Why An IPO?
While uncovering the ins and outs of business decisions always requires a degree of speculation, going public wasn’t a smooth path for KinderCare or its former owner, the Swiss private equity firm Partners Group, which still maintains a controlling share in KinderCare (more on that in a minute). In 2021, KinderCare first considered, then abandoned, an IPO for undisclosed reasons. Then, in the summer of 2023, it was reported that Partners Group was seeking bids to sell 50% of KinderCare to another investment firm. Clearly, they were unsuccessful.
It’s not just the IPO that’s important to look at, there’s another factor at play: debt. As Brooke DiPalma reported in Yahoo Finance, “The company plans to use the [IPO] proceeds to pay back debt. As of June 29, the company had $1.5 billion in outstanding debt, plus $104.2 million available for borrowing under its credit facilities and outstanding letters of credit of $55.8 million.” DiPalma added that KinderCare CEO Paul Thompson said, “Most of [the IPO proceeds are] going to paying down debt,” and that was a key interest in going public.
Even after the IPO, S&P Global’s bond ratings gave KinderCare a B+, which is considered below “investment grade,” although thanks to the debt paydown, it represents an improvement over previous ratings. This suggests that the company was overstretching itself financially, and arguably introducing undue risk into the nation’s child care system.
It’s not the first time we’ve seen high debt crop up in child care. Although the U.S. has been spared to date, there have been multiple instances of large, debt-riddled child care chains collapsing, such as Australia’s ABC Learning and the Netherlands’ Estro Group, before wiggling their way out of trouble with support from government or financial institutions. KinderCare itself became so indebted in the late 1980s and early ‘90s that by 1992 the company had to file for bankruptcy. According to DiPalma’s coverage in Yahoo Finance, David Trainer, CEO of the investment research firm New Constructs, expressed skepticism about KinderCare, calling it “unprofitable and very expensive stock,” and adding that, “It looks like a private equity bailout.”
What Can We Learn From IPO-related Business Disclosures?
This is where the fact that Partners Group retains a controlling interest comes in. KinderCare’s owners appear less dedicated to creating a sustainable business model as they are to maximizing profit. In a post-IPO analysis, S&P Global notes: “We believe the company’s highly leveraged financial risk profile points to corporate decision-making that prioritizes the interests of controlling owners. This also reflects private equity sponsors’ generally finite holding periods and focus on maximizing shareholder returns.”
I am frequently asked how a child care company could possibly make enough money, given the sectors’ difficult economics, to justify interest from investors seeking high returns. One helpful facet of a company IPO is that they are required to submit numerous legal documents, including a comprehensive detailing of company dealings known as a prospectus. The following three revelations from KinderCare’s prospectus stood out to me:
- KinderCare is willing to close centers because they are financially underperforming. In the prospectus, under a heading called “Competitive Strengths,” the document states: “We believe the quality of our portfolio is also differentiated from our peers due to prior center optimization efforts, a successful acquisition track record, consistent processes and investments, and a suburban-focused center network. From 2012 to 2017, we strategically closed 380 underperforming centers.” These closures, the prospectus explains, allowed KinderCare to increase revenue and enrollment at their remaining centers.
- KinderCare is increasingly focused on affluent families rather than serving families with a broad range of income levels. KinderCare has long stood out as one of the few large chains that accepts a solid number of children on child care subsidy. Yet in the prospectus, the company writes of, “Strong tailwinds supporting demand for premium ECE offerings,” due to the growing number of U.S. households with income of at least $140,000. The prospectus also notes that targeted acquisitions of other chains in recent years have given KinderCare “access to the premium ECE market — resulting in a quality portfolio with density in suburban communities.” Given KinderCare’s size and growth trajectory, this suggests a future in which there are more child care haves and have-nots.
- KinderCare benefits when the broader child care system fails. According to the prospectus, the company seeks to “Increase same-center revenues through improved occupancy and consistent price increases across our portfolio offerings.” It says: “We employ a multipronged strategy to increase same-center revenues through enrollment and tuition rate increases … As a scaled provider, we believe we are well positioned to benefit from the combined impacts of growing ECE demand and potential supply reductions driven by center closures as stimulus funding sunsets.” In essence, KinderCare is saying that they have an interest in a child care system characterized by scarcity and the ability to charge high fees.
What Does This Mean for the Future of Large, For-Profit Child Care Companies and the Child Care System Writ Large?
As I and other skeptics of investor involvement in child care have pointed out, the question here isn’t whether it’s inherently a problem for a company to try to make money or to try to identify customers who can pay a premium. Families making over $140,000 need and deserve good child care options, too. The question is whether profit-maximizing investment is an appropriate model for a human-centered service, such as child care, and what a growing investor trend means for efforts to create a universally affordable, accessible and high-quality system with well-compensated educators.
Consider again that KinderCare closed nearly 400 centers(!) due to the fact they were not bringing in enough revenue. While we are not privy to the specifics of those decisions, that degree of closures, at a time when licensed child care deserts were spreading, should raise eyebrows if not hackles. Did the company — which, according to its prospectus, compensates its executives with millions of dollars in salary and stock options, and is backed by a private equity group with over $200 billion of assets — do everything possible to keep those centers open and continue serving families?
It is crucially important to distinguish between large for-profit chains backed by investors seeking high levels of financial returns (be they private equity firms, shareholders, venture capitalists or other forms of institutional finance) and smaller for-profit child care programs. Nearly all family child care programs are organized as for-profits, as are independent small businesses with one or two centers, and these typically do not have institutional investors. The two types of for-profit providers — small businesses and large chains — are qualitatively different, with massively divergent levels of profit-maximizing pressure. Public policy should treat them as such.
That’s why Massachusetts has set such an important precedent by becoming the first state to legislatively define large, for-profit child care chains. For the Bay State, any for-profit provider with 10 or more licenses in the state is considered its own category for the purposes of accessing state child care grants. Other states may choose to set the bar at a different level, but either way, a distinction should be made. Since these large for-profit chains are a separate class of provider, they require specialized oversight to hold them accountable for treating parents, children and staff well; to ensure that public funds are used for the public good; and to safeguard against risky financial maneuvers that could put the larger child care system at risk.
KinderCare’s IPO proves, yet again, that these chains aren’t going anywhere anytime soon. We’re overdue in reckoning with their role in our child care system.
Elliot Haspel is a nationally-recognized child & family policy expert and commentator, with a specialty in early childhood and education issues. He is the author of Crawling Behind: America’s Childcare Crisis and How to Fix It, and a Senior Fellow at the think tank Capita. Elliot has appeared on television as an analyst, including onThe PBS Newshour with Judy Woodruff, and his writings have appeared in a wide variety of top publications, including The New York Times,The Washington Post, andThe Atlantic. Elliot holds an B.A. in History from the University of Virginia and an M.Ed. in Education Policy from Harvard's Graduate School of Education.
Elliot also writes a free semi-monthly newsletter, The Parents Aren't Alright.
