As states and the federal government pour money into early education, how will they keep a public good from becoming a private cash cow?
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, a senior fellow who studies early childhood education at the nonpartisan think tank Capita, told me. Now each of the top five for-profit child-care chains—KinderCare, Learning Care Group, the Goddard School, Primrose Schools, and Bright Horizons—are controlled by private-equity funds, and private-equity backed centers represent 10 to 12 percent of 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.
[Rogé Karma: The secretive industry devouring the U.S. economy]
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, 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 from a care facility; every year, some children die in 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.”
