Private equity is reshaping American child care

A SPOT AT Little Friends, an independent child-care centre in Greenwich, Connecticut, is highly sought-after. Parent testimonials are glowing. The waiting list is years long. Yet the competition for enrolment may not be as fierce as the competition to buy it. Verna Esposito, who founded and runs the centre, has watched for years as private-equity firms have snapped up struggling rivals. They would gladly add her centre to their ranks. “They email, they call—they even sent me a Christmas gift,” she says. “It’s relentless.”

As the covid-19 pandemic disrupted the child-care industry, large firms acquired small providers at low valuations. Firms run by private-equity shops now control 10-12% of America’s child-care market, measured by total capacity. Eight of the 11 largest child-care providers are owned by private equity.

Private equity’s bet is two-pronged. First, there will be economies of scale. Child care is a fragmented industry, mostly made up of independent providers. Consolidating such businesses is a hallmark strategy of private equity. Big chains can centralise procurement and use technology to streamline administration. Second, they can charge more. Enrolment fees at the Primrose School, a private-equity-owned chain, can be about 50% higher than those of independent centres nearby. That parents would pay was not certain—on average, spending on child care makes up 9-16% of median family income. But it seems to be working. Chains enjoy operating margins of 15-20%, say insiders.

It is easy to see the appeal of large chains. Parents find it hard to judge the quality of independent centres. Chain facilities often look shiny, new and clean. Scale makes it easier to offer flashy technologies, like apps that update parents on milk consumption and naps. If a child at a centre is neglected the entire business suffers, encouraging high standards. Opting for a chain may therefore seem less risky.

Yet child-care centres cater to two customers: parents and the child. Parents may be mollified by shiny facilities and apps—but babies tend to do best when paid lots of attention by trusted caregivers. It is less clear that private-equity backed chains provide this. They tend to pay staff poorly. In Connecticut, teachers at KinderCare earn $18.67 an hour; those at Little Friends get $21.50 an hour. A former director at a chain backed by private equity says hiring good teachers at such low wages was nearly impossible, forcing her to retain staff unfit to care for children. In forums, day-care workers moan about chains operating “at ratio”, meaning they must care for the maximum number of children state rules allow. Such tactics make bathroom breaks a logistical nightmare.

Lawmakers are worried. In 2024 Massachusetts passed a bill that limits how much public funding large for-profit chains can claim, which will hurt private-equity operations. Vermont capped tuition-fee rises for publicly funded providers after Little Sprouts, a French chain backed by private equity, acquired local centres. Yet the government is rarely adept at setting prices or pay. Looking after children could be about to get even messier. ■