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PRIVATE EQUITY HAS ITS EYES ON THE CHILD-CARE INDUSTRY  
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Adam Harris
February 21, 2024
The Atlantic
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_ As states and the federal government pour money into early
education, how will they keep a public good from becoming a private
cash cow? _

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Last June, years of organizing in Vermont paid off when the state’s
House and Senate passed landmark legislation—overriding a
governor’s earlier veto—that invests $125 million a year into its
child-care system. The bill expanded eligibility for state assistance
to 575 percent of the federal poverty level, meaning that more than
7,000 new families are expected to receive money for child-care
expenses. Funding will also become available to help day-care centers
recruit and retain teachers and expand capacity; centers will also
receive additional money for providing nonstandard hours of care.

But now advocates are worried that the wrong people stand to benefit
from the program’s generosity. Any time there is a windfall of
public money, with few strings attached, unintended consequences are
nearly certain to follow. Thanks to the new law, more Vermont families
will have more to spend on child care, and centers will receive
additional money without explicit rules around how to spend it. Both
of those facts will make child care an attractive target for
private-equity groups looking for an industry with lots of incoming
revenue.

Private equity’s interest in child care has been growing in recent
years. “While there has been corporate for-profit child care since
the 1970s, private equity only got in starting in the early
2000s,” Elliot Haspel
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who studies early childhood education at the nonpartisan think tank
Capita, told me. Now four of the top five for-profit child-care
chains—KinderCare, Learning Care Group, the Goddard School, and
Primrose Schools—are controlled by private-equity funds, and
private-equity-backed centers represent 10 to 12 percent
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the market.

Private investors are intrigued by child care for the same reasons
they became interested in nursing homes and other health-care
services: intense demand, government money, and relatively low
start-up costs. “Their goal is not long-term sustainability; their
goal is to try to turn a profit,” Haspel said.

Private equity’s foray into child care could go a number of ways,
but its introduction has largely not worked out well for other
sectors—and certainly not for many people who rely on those
sectors’ services. In his book, _Plunder: Private Equity’s Plan
to Pillage America_, Brendan Ballou, who investigated private-equity
firms at the Department of Justice, posits that the private-equity
business model has three basic problems. First, these firms buy a
business with the intention of flipping it for a profit, not long-term
sustainability, meaning that they are trying to maximize value in the
short term and are less likely to invest in staff or facilities.
Second, they tend to load businesses up with debt and extract a lot of
fees, such as charging child-care providers for the privilege of being
managed by the firm. And perhaps most important, their business
structure insulates firms from liability.

In 2009
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Annie Salley, a resident of a nursing-home chain purchased by the
private-equity group Carlyle, died after an injury she sustained while
going to the bathroom. Her family sued Carlyle, but a judge dismissed
the case after the firm argued that it didn’t own the
chain—instead, it said it advised a series of investment funds, such
as Carlyle Partners V MC, L.P., that were the lone shareholders in the
chain. Children get hurt in child care; children occasionally go
missing
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a care facility; every year, some children
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day cares. If private-equity firms can structure their relationship to
day-care centers as they have nursing homes, families may have little
recourse should they encounter a serious problem.

Though private-equity-backed child-care providers can—and often
do—offer good services to families, their business model can also
prove ruinous. In other sectors, private-equity groups have been
notorious for extracting exorbitant fees from businesses they’ve
acquired in leveraged buyouts; when they’ve had a chance to raise
wages for workers or pay down their private-equity debts, they’ve
regularly opted for the latter. Although Vermont’s bill sought to
improve the wages of educators, it does not include a salary
floor—which means that money that flows into centers may not
necessarily go directly to staff—and without such a safeguard, what
is stopping outside firms from taking the first, significant cut?

Miriam Calderón, the chief policy officer at Zero to Three, a
nonprofit focused on babies, toddlers, and their families, hopes
federal lawmakers consider these concerns as they begin to reimagine
the federal footprint in child care. Calderón worked in the Biden
administration during its first year and helped conceive the
early-childhood-education components of the Build Back Better Act,
which would have established a child-care entitlement program for a
majority of families. Congress isn’t moving on the issue now, but
Calderón and advocates told me it would be foolish to wait until
Congress was working again to think about protections around public
dollars. Private-equity-backed chains will likely continue to grow as
a share of the market, and if they gain too much of it, they would
have the power to fight back against policies that ensure that staff
are fairly compensated and families aren’t paying even more
exorbitant fees than they already are. “The work now is to really
think through the right guardrails and the right policies so when we
get to a moment, again, we’re ready,” Calderón said.

As Haspel put it, “The time for the government to act is now, before
private equity is so entrenched in child care that it becomes
impossible to exorcise.”

_Adam Harris [[link removed]] is a
staff writer at The Atlantic._

* Child Care
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* private equity
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* private profits
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