When Private Equity Comes for a Public Good

Adam Harris discusses how financiers could change the child-care industry.

Latest Feb 24, 2024 0 46 Add to Reading List

When Private Equity Comes for a Public Good

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In some states, public funds are being poured into the child-care industry—and private-equity groups are seeing an attractive target for investment. My colleague Adam Harris wrote today about how private investors are circling child-care centers, potentially to the detriment of care providers and families. I called Adam to talk about what makes the world of early childhood education appealing to financiers, and what steps the government may take to protect the industry.

First, here are three new stories from The Atlantic:

Private Equity and a Public Good

Lora Kelley: I found your article fascinating, in part because I don’t really think of child care as a flashy sector. Why does this industry appeal to private-equity investors?

Adam Harris: It is one of those businesses that is always going to be there. Parents need a place to send their children.

The industry became more appetizing to private equity as the pandemic made people acknowledge how necessary child care is. We all know child care is so expensive, and state and federal governments are thinking about ways to put money into it.

Lora: It seems like there would be so many liability risks with child care. How are private-equity firms approaching these potential legal issues?

Adam: Private equity firms are effectively able to skirt some of that liability because they don’t technically own businesses. These firms set up a fund and get outside investors. Then they often take out loans and use that debt to buy a business—in this case, groups of child-care facilities. So if a child-care center gets sued, the private-equity fund can basically say, Well, we’re not technically the owners, we only manage a fund that advises the business.

Advocates are trying to get some guardrails put in place so that, when you have these lawsuits, the funds have some skin in the game.

Lora: What would government guardrails look like?

Adam: The government could say that new funding has to go directly toward child-care providers’ pay. Or they could ensure that private-equity firms are liable when something goes wrong.

Those are just a couple examples, but advocates are thinking about all of this right now as we’re looking at a potential renewal of the public funding we saw for child-care programs due to COVID. Large government investments in child care are only going to make the industry more appetizing for firms.

Lora: What incentives do private-equity firms have to actually make child-care centers better for families and child-care providers?

Adam: The biggest incentive would just be altruism. And relying on a firm’s potential altruistic behavior is really a gamble. When we’re thinking about kids and families, and we’re thinking about a service that is essential to the country—not just for people to be able to go to work but also for child development—I don’t think it’s responsible to gamble like that, especially when we’re thinking about the private use of public money.

Private equity still makes up a very small share of the child-care market. It’s 10 to 12 percent of the market, but it’s growing. And the concern is that if it grows too much, then private-equity firms may have too much power in the market. They may be able to lobby their way out of stringent and strict regulations because they’d be fundamentally too big to fail.

Lora: It’s almost a matter of getting the guardrails in before it’s too late.

Adam: Absolutely.

Lora: How would private-equity investment potentially change the experience of child care for caregivers, children, and families?

Adam: I think that will vary. There are some private-equity-backed child-care centers that are actively looking to do good work. But some firms have also historically operated in ways that aren’t in the best interest of those their companies serve.

In the worst-case scenario: You could see a poorer product for families, a poorer work environment for educators. And you can have situations where you have a really extractive business model running up against an important public service.

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