Making predictions can be an exercise in futility but here goes anyway: The U.S. will experience a child care crisis within the next 10 years. The trigger will be the collapse of a large, debt-laden, for-profit provider of child care. At the prospect of seeing thousands of locations suddenly shuttered, jeopardizing the many families who rely on such help while the parents work, the government will be forced to provide financial support while arranging a sale or takeover the provider.
What’s frightening about this prediction is how plausible it is given the obvious risks and how little anyone in a position of authority is doing to prevent it from happening. Consider that Wall Street private equity firms have rapidly expanded into the business of providing child care in the U.S. with no guardrails. Some 775,000 child care spots, which think tank Capita estimates to be 10% of the market share, is held by investor-backed, for-profit chains, according to an annual report on for-profit childcare prepared by the industry journal Exchange.
Private equity’s track record in providing human services such as care is a sea of red flags. Recently, the U.S. Senate voted to hold Steward Health Care System LLC’s chief executive officer in criminal contempt for failing to testify about his role in the collapse of the bankrupt hospital operator’s finances. With the help of private equity giant Cerberus Capital Management LP, Steward turned six Boston-area facilities into one of the nation’s largest for-profit hospital chains in a debt-fueled expansion before filing for Chapter 11 bankruptcy protection in May, making it one of the biggest hospital bankruptcies in decades and putting tens of thousands of patients and workers are in turmoil.
Private equity firms are expanding into child care market often by first buying an operator with a chain of facilities and then purchasing independent providers to expand the brand. This process accelerated during the pandemic when the child care sector was rocked by closures and new health rules. Even as the overall sector contracted, for-profit chains grew by 8%. Of the 15 largest, 10 are owned by private-equity firms, four are privately held, and one is publicly traded.
The business of child care is hard and getting harder. Even though parents typically pay around a quarter of their income for such services, profits are razor thin. There’s little margin for error even before considering the excess leverage private equity foists upon the businesses. The government seems to know where this is headed.
“Relying on private money to provide child care is bound to come up short,” the U.S. Treasury Department stated in its 2021 assessment of the industry.
It’s unfortunate for children. For-profit care is generally considered to be lower quality than nonprofit care. But that’s just the start, having a business that serves children but prioritizes profits, and in the case of private equity, relies on heavy debt and is cloaked in financial opacity brings enormous risks and social costs.
Consider what happened in Australia in 2008. ABC Learning Centres Ltd., a private equity-owned for-profit firm that looked after 1 in 3 Australian children in day care, failed and had to be rescued. It was then converted to a nonprofit to focus on “children’s development rather than maximizing profits.” Australia passed laws requiring increased financial disclosures from chains.
The idea that the push for profitability to satisfy private equity investors can lead to abuse and neglect in the delivery of services has long been the accusation in the elder care space, where researchers have found that nursing homes taken over by private equity have a much higher probability of mortality.
The third-largest, for-profit, investor-backed child care chain in the U.S. (and the largest backed solely by U.S. investors) is Primrose School, owned by Atlanta-based Roark Capital. It’s a name child labor advocates know well.
Researchers the advocacy group Good Jobs First recently aggregated child labor violations and the private equity firm was at the top of the list, with more fines for child labor at its holdings than all the McDonald’s restaurants in the U.S. combined. Roark was fined $1,734,519 for 2,047 violations and McDonald’s $1,725,638 for 2,262 violations. (Reuters reported in May that Roark was exploring the sale of Primrose that could value the business at almost $2 billion, including debt. Each school is independently owned and run by franchise operators.)
It sounds like a weak sci-fi premise: A fantastically wealthy investor conglomerate named after an Ayn Rand character profits both from the care of children and the illegal sale of their labor. Children raised by private equity. The fix isn’t hard. Australia’s public disclosure law is so obviously necessary it’s more of a zero step than a first one. Put a cap on the number of child care centers an investor-backed chain can operate, or bar them from the sector altogether.
Children shouldn’t be a profit center.