Childcare’s private equity crackdown has a blind spot

The primary source, an opinion column in The 74's childcare coverage, argues that the current push to regulate private equity in childcare misses a significant share of large for-profit chains. The author, who has tracked closures at Guidepost Montessori for nearly two years, notes that the network, which at its peak had more than 130 programs mostly serving children under age 6, collapsed after its parent company, Higher Ground Education, filed for bankruptcy and closed close to half its locations. Guidepost was backed by millions of dollars in venture capital, a funding model most existing reform proposals would exclude.

The article describes four funding models for large for-profit chains: private equity, publicly traded companies, venture capital, and family ownership. According to the author's analysis of Exchange Press's annual report on for-profit childcare, more than half of the 10 largest chains are PE-backed, including Learning Care Group, Cadence Education, Primrose Schools and The Goddard School. The two publicly traded U.S. chains, KinderCare and Bright Horizons, both previously had PE owners. Partners Group retains a controlling stake in KinderCare, while Bright Horizons has no controlling shareholder. Kiddie Academy, with more than 375 sites, is family-owned.

The author's central criticism is that the Protecting Childcare from Private Equity Act, introduced in July by Rep. Josh Riley, would require the SEC to collect ownership data from PE funds acquiring childcare firms and would bar sales, dividends and stock buybacks for four years after acquisition. However, those provisions apply only to investment firms above a certain size that control more than 50% of a chain or its stock. The author says this language would capture KinderCare but exclude Bright Horizons, family-owned chains and Guidepost. The article cites an AQR Capital Management analysis stating that institutional investors widely expect PE to outperform public equity by 2%-3%, but the author contends the difference is one of degree rather than kind.

The author also cites a paper by economists Chris Herbst and Jessica H. Brown, which found modestly higher teacher and student turnover and less willingness to accept subsidy vouchers at PE-funded chains. Herbst and Brown reported that PE-owned sites charge rates about 30% higher overall than non-PE providers, but that these differences disappear when compared with other large chains. The author argues that the largest gaps lie between chains and non-chain programs, and that size itself creates systemic risk, pointing to ABC Learning's 2008 collapse as an example.

The author proposes that states create a new license category for large childcare chains, defined by the number of sites or children served. Such licenses could require disclosure of financial health and staff turnover and restrict public funds used to enrich investors. The article notes that California and Colorado already distinguish licenses by program size, and that a size-based approach may be more politically viable than regulating PE alone, given that private equity backers have argued successfully in several states that singling out governance types is unfair.