Private equity is plotting a child care takeover: Congress must step in

If there is any population the profit motive should be kept far away from, surely it is babies and toddlers. Yet private equity is rapidly making inroads into the child care sector, expanding in size and political power while damaging quality, accessibility and affordability. 

With major child care legislation unlikely to move in a divided Congress, now is the time to seek bipartisan agreement around guardrails for investor-backed child care chains. Otherwise, private equity may well trample over a service relied on by millions of parents and children.

Investor-backed child care chains differ from independent “mom-and-pop” programs because they are either owned by a private equity firm or, in one case, traded on the stock market. In other words, they are accountable to investors looking for a big return on their money and therefore are hopelessly conflicted.

A new brief I authored for the think tank Capita, where I am the director of climate and young children, shows that 9 of the 11 largest U.S. chains meet this definition, collectively serving over 750,000 young kids every day. Their growth since the turn of the millennium has been explosive. Several of these chains are now owned by overseas firms based in countries like Switzerland and China, and research from the United Kingdom confirms many are deeply debt-ridden. The risk of collapse is real, as the world found out in 2008 when Australia-based ABC Learning, with over 2,000 sites worldwide — including in the U.S. — went under due to profit-seeking financial mismanagement.

While individual programs may be fine, these chains are not broadly adding much value for parents, staff or children. Quality in large for-profit chains tends to be lower than in nonprofit or independent programs. Despite that, chains regularly hike already-obscene parent fees and pay their teachers poorly all while many make a 15 to 20 percent profit margin. Their growth is largely through acquisitions and mergers, not building new supply. Programs tend to operate in high-income neighborhoods with a clientele they can fleece, neglecting rural and low-income areas. And as The New York Times reported, the interest group that serves several large chain programs actively lobbied against comprehensive child care legislation in the Build Back Better Act —  then chain executives showered Sen. Joe Manchin (D-W.Va.) with campaign contributions the month after he killed the bill.

This is par for the course. While private equity may have a role to play when it comes to assisting failing movie theaters or furniture stores, when it meddles in human services the results are frequently disastrous. Simply look at the damage done in elder care, higher education and K-12 schooling.

So what can Congress do? The first step is to investigate. There is relatively little public data about these companies, such as how their fees relate to their profits or details on their investors. Convening hearings could finally shed sunlight on a subsector that has been thriving in the shadows. 

Hearings alone, however, won’t necessarily uncover the important answers. Drawing on a recent Australian law, chains over a certain size should be required to submit public financial disclosures — including their profit margins, fee structure, compensation practices and beneficial owners.

A more muscular option is to require private equity firms to accept joint liability with their owned sites. As The American Prospect’s David Dayen has written, “This would prevent bust-out scenarios where private equity takes all the value and leaves the portfolio company as a husk: Instead, the investment firm would be on the hook for bankruptcy, pension obligations, or legal judgments.”

The status of investor-backed chains should also be considered in designing publicly-funded child care policies. Canada has pointed the way as they rolled out their nationwide “$10 a Day” child care system. To take public funding, for-profit programs in most provinces must accept a parent fee cap and reasonable restrictions on profit, executive compensation, and so on. No investor should be getting rich off public money intended to make high-quality child care affordable and accessible.

The final set of options is declarative. Chains could be given a maximum number of licenses they can hold without converting to nonprofit status. Or, much as some experts have called for a ban on private equity ownership of nursing homes, the industry could simply be banned from holding child care companies, with investors and shareholders required to divest over a period of time.

The broader point is that Congress has any number of tools at its disposal to rein in private equity before it consumes the child care sector. For too long, private equity has been allowed to encroach within the U.S. child care system with little to no scrutiny. Republican or Democrat, there should be a consensus that the raw profit motive belongs far, far away from our most vulnerable children. Even a divided Congress has the ability to act and protect America’s families.

Elliot Haspel is the director of climate & young children at the think tank Capita, and author of the book “Crawling Behind: America’s Childcare Crisis and How to Fix It.”