Americans are shelling out thousands per month on childcare. Private equity could be making the crisis worse

It was the white orchids that struck us first, sitting elegantly on the reception desk. Then the two mid-century leather chairs in the waiting area—the kind of furniture you might find in the swanky lobby of an investment firm or advertising agency. These corporate design details—including a monochrome company logo and a huge wall-mounted TV—caught us off guard. After all, we weren’t looking for stock tips or help with an ad campaign. We were hunting for childcare for our baby son.

My wife and I were touring all the daycare centers within a plausible distance of our apartment in Washington, D.C. We were spoiled for choice. There were at least six providers within a 15-minute walk, including a home-based daycare; a mom-and-pop place; a branch of a small, family-run chain; and a national non-profit. They all seemed friendly, well-run—and rough around the edges. One, located in the basement was even a little dungeon-like. But then we visited the Gardner School, which was about to open just three blocks from home. The Gardner School felt different—and it wasn’t just the chilly, reception-area atmosphere.

The enrollment manager showed us through a sleek glass door into a corridor where the ceilings were painted with fluffy clouds against an azure sky. The dining room featuring a laminated lunch menu and its mirrored walls doubled as an exercise studio. There was a special room for “enrichment classes,” complete with test tubes and child-sized safety goggles, where toddlers could make their first forays into experimental science.

How could this childcare center afford such lavish facilities? All the places we visited were expensive—between $2,000 and $3,000 a month—but none of the others felt flush. Frankly, they could have used a coat of paint, to say nothing of enrichment rooms and fitness suites. The Gardner School’s tuition was in the upper range, but it wasn’t the priciest. And yet here it was with money to burn on cute fripperies. A few days after our visit we received a package at home, containing a teddy bear wearing a branded T-shirt. The accompanying note invited us to join “the Gardner family.”

What was the Gardner School’s secret, we wondered as we unboxed our bear? Then we found our answer. A quick Google search revealed that the Gardner School, founded in 2004, had been acquired in 2019 by a New York private-equity company called Quad Partners .

Private equity’s involvement in the U.S.’s childcare industry has been expanding since the mid-1990s, when KKR , one of the country’s largest PE firms, invested in KinderCare, the U.S.’s biggest childcare chain. To providers with big ambitions, the benefits of such investment are clear. KinderCare had been through a rocky few years, which included a period of bankruptcy. Backing from KKR gave it the resources not merely to survive but to grow, by opening new centers and acquiring other childcare businesses. KKR bought its stake in Kindercare for around $500 million. By the time KKR sold the business seven years later, it was worth over $1 billion . (None of the private-equity backed childcare providers or private-equity firms mentioned in this piece responded to requests for comment from Fortune .)

All very impressive. But what about if you’re a parent for whom corporate growth isn't the first priority? As we considered where to send our son, private equity’s role in the market concerned us. Recent books on the industry include provocatively titled ones like Plunder: Private Equity’s Plan to Pillage America by Brendan Ballou, a federal prosecutor at the U.S. Department of Justice. Plunder contains a litany of horror stories about the behavior of private-equity companies in all kinds of industries as they pursue profits, the worst of which were deaths in understaffed nursing homes where private-equity owners have slashed headcount to save money.

As I read Ballou’s book, the idea of sending our son to a school operated by private equity became increasingly alarming. The mirrors in the dining room had a reassuring polish. But what lay behind that sheen? Were the same corner-cutting tactics that Ballou described being applied to the young as well as the old? As we dropped our son off each morning, would we be sending him into the warm embrace of “the Gardner family,” or into the profit-hungry maw of uncaring capitalism?

Private equity's growing control

Since KKR’s acquisition of Kindercare over 30 years ago, private equity’s interest in childcare has ballooned. Today PE companies control around 12% of the market in the U.S., including eight of the 11 largest providers by capacity. A ninth, Bright Horizons, was backed by the private-equity firm Bain, before going public in 2013. Two periods of time have spurred this expansion. The first came in the late 2000s, when investors shaken by the volatility of the dotcom bubble and the financial crash started to look for steadier, more resilient markets. They found them in the care economy, and started to pump money into hospitals, dental practices, nursing homes and pre-K education.

These services share one key characteristic: because they are essential, there is constant demand and people are prepared to pay handsomely for them. “Childcare is something that families need in order to work,” says Elizabeth Leiwant, director of government relations at Neighborhood Villages, an education advocacy group in Massachusetts. “They will pay what they need to pay even if it’s more than they can afford.”

The second phase that drew PE investors towards childcare was the COVID-19 pandemic. For the majority of childcare providers, COVID created the perfect storm of staff shortages, falling enrollment, and dwindling revenues. Over 16,000 childcare businesses went bust, and tens of thousands more came close. But for PE-backed chains with the resources to weather it, the pandemic also presented an opportunity to grow.

Edged out by private equity

Children’s Place, a preschool in Rochester, Minn., has been in business since 1972. Most of its staff have worked there for at least a decade. But as experienced and as rooted in their community as they were, nothing protected them from the turmoil of COVID.

As the virus took hold, the childcare industry suffered an exodus of both staff and students. In some parts of the U.S., centers were forced to close by lockdowns, which pushed employees to find other jobs. Minnesota allowed its providers to stay open, but that didn’t protect Children’s Place from resignations. “We lost a lot of people, and they never came back,” says Brenda Parshall, the preschool’s director. “They were worried it wasn’t safe to come in.” According to U.S. Bureau of Labor Statistics data, between February and April 2020 the number of workers in the American childcare industry fell by around 40%. Even now there are still 40,000 fewer people in the sector than before COVID struck.

Parents, millions of whom were working remotely, also removed their children from the system. Why pay for full-time childcare if you don’t have to leave the house? At Children’s Place, enrollment declined from 75 to 30, and the school’s finances went into freefall. “The bills stayed the same, but we were making half the income,” Parshall says. President Joe Biden’s American Rescue Plan, which issued $39 billion in grants to keep the sector standing, provided some relief. Children’s Place received $1,300 a month in assistance, which helped cover utilities. And when the school fell behind on its rent payments, the church from which it leased its building allowed it to stay. Somehow Children’s Place clung on.

But then another challenge appeared right next door: a new branch of O2BKids, a fast-growing chain of childcare centers with 63 outlets across the country, and backed by Spire Capital, a New York private-equity firm. First, a gleaming building went up, with colorful classrooms full of box-fresh furniture and mountains of toys. Outside there was an AstroTurfed play area, complete with pedal-powered cars for children to scoot around on. The aesthetics alone worried the staff at Children’s Place. “We’ve been around since 1972,” says Julie Wingert, the school’s manager. “We’ve got old stuff.”

When O2BKids began to hire staff, they offered lavish incentives. As well as health care coverage—a rarity in the cash-strapped world of childcare, and not something Children’s Place could afford—new recruits would get free tuition for their own children and big bonuses if they encouraged staff or families to follow them. They were even entitled to pet insurance.

As the staff at Children’s Place watched O2BKids’ operation unfold, they decided the game was up. “The new place was offering all the bells and whistles,” says Wingert. “Who’s going to come to work for us for minimum wage? We would never get another employee at all with them right next door.”

The new daycare was the last straw. The board of Children’s Place decided to shut the school. Wingert and her colleagues will have to find new jobs—but not at O2BKids. “My son asked me yesterday, ‘It’s more money, Mom, why don’t you go?’ But it's a matter of principle. That’s what forced us to close.”

Capitalizing on 'the fragility of the market'

The fate of Children’s Place illustrates the challenges facing the vast majority of small and independent childcare providers, and the opportunity that presents to fast-growing chains with deep pockets. “The pandemic laid bare and exacerbated the fragility of the market,” says Melissa Boteach, vice president of income security and childcare at the National Women’s Law Center. The burdens created by COVID-19 created thousands of distressed businesses for larger players to acquire. And as childcare centers closed down, the chains could fill the gaps they left behind. Since 2021, O2BKids has acquired 26 schools, and this year alone it will open 20 new outlets. In the last two years KinderCare, now owned by the Swiss private-equity firm Partners Group, has launched 15 new centers in Massachusetts alone .

On one hand, this looks like a good thing. Parents need childcare, and the industry’s workers need jobs. If independent providers are closing their doors, shouldn't we cheer when others step up—especially if they offer better benefits to staff? But the picture is more complicated. There are several reasons to worry.

The first is price. Most childcare centers find it difficult to increase profits by reducing expenditure. “The vast majority of costs in child development are teachers’ salaries,” says Jonathan Horowitch, CEO of the Washington, D.C., branch of Easter Seals, a national network of non-profit childcare centers. In many cases, these salaries are impossible to cut further: they are already close to minimum wage. The ratio of teachers to students is also strictly regulated. For infant care, you need either one teacher for every three or four children, depending on the state. “This is not a high-margin business,” Horowitch says

So with cost-cutting so hard, how do you make money? Simple: You target the wealthy, and charge them more. Researchers at Capita, a think tank, studied the distribution of private-equity backed childcare centers across seven states, and found a clear trend: the companies selected high-income areas for their outlets. In the districts where these centers were located, the median household income for a family of four was over $88,000, compared with a national median income of $74,000.

Rochester, Minn., is a case in point. The Mayo Clinic is headquartered there. The town is flooded with well-paid doctors. According to the most recent census data, the median family income is $136,000, versus a statewide median of $105,000, making it a perfect venue for a childcare chain charging high prices. Full-time tuition at Children's Place was $995 a month. At O2BKids the price for toddlers is $1,700 a month, and for infants over $1,800.

Childcare prices are already prohibitive for many parents. The U.S. Department of Health and Human Services recommends that families spend no more than 7% of their income on childcare. Yet according to Care.com, an online childcare marketplace, average costs are currently running at 27% of income, and still rising. According to data from the Bank of America Institute, the bank’s internal think tank, average childcare costs are now 32% higher than in 2019, driven up by a range of inflationary factors, including rent, insurance, and energy.

As private equity consolidates its position in the childcare market, focusing its resources on the top end of the market, this problem is likely to get worse. “When you control the supply, you have more power to raise prices,” says Melissa Boteach of the National Women’s Law Center.

The second area of concern is quality of care. To be sure, many individual private-equity-backed centers offer superb service. But looked at as a whole, there are troubling trends. One of the key indicators of quality is staff turnover, says Angela Vierkant, who works as a childcare quality-improvement coach at Families First of Minnesota. “Children need that sense of continuity. And children who don’t feel safe and aren’t connected can’t learn.” According to Vierkant, centers with high turnover see increased levels of disruptive behavior among children. “The centers that are staffed with longevity have more success,” she says.

A 2019 report from the HHS found that for-profit franchise chains had significantly worse turnover rates than independent centers. In all, 47% of franchise outlets had high turnover, defined as 20% or more staff leaving within the previous 12 months. This was compared to 30% among independent providers. “The fact that staff are rotating in and out shows that your staff are extremely stressed,” says Audrey Steinon, program manager for industrial policy at the Open Markets Institute. “There’s something going on at the provider level that keeps disrupting the relationships the children need.”

Hidden fees

So where does this leave my own search for childcare in Washington, D.C.? For providers the capital is both an expensive city to operate in, with high rents and a high minimum wage, and a lucrative market, full of rich, workaholic lawyers and lobbyists. It’s the kind of place, in other words, where you can offset the cost of doing business by charging top dollar for your services. And charging they were: every place we saw would cost us as much or more than our monthly mortgage payment.

My wife and I are both journalists—not a profession known for sky-high salaries. So we immediately discounted the most expensive places. That left us with four centers to choose from, including the private-equity backed Gardner School. But when we took a closer look at Gardner’s fee structure, things weren’t quite what they seemed. That “enrichment room”? Every time our son used it, we would be charged $20. Then, in August, the school would introduce a special “summer-camp curriculum,” which, despite being mandatory, came with an extra charge of $100.

None of the other places on our list had schemes like this, and to us they seemed like a sly way of driving up the price. In that respect, we worried it was following the private-equity playbook.

But what about quality of care and staff turnover—the issue so starkly illustrated in the HHS report from 2019? For this specific center, we had no data to go on: the D.C. branch of the Gardner School hadn’t yet opened when we visited. But then we began to talk with families from other Gardner Schools around the country.

One set of parents in Illinois had their kids happily enrolled at a childcare center called The Compass School. But in 2022, the Gardner School acquired Compass. “Once the Gardner School took over it slowly took a turn for the worse,” one parent said. Most of the Compass teachers left, and new staff didn’t stay long. “During the transition… there [was] big time turnover, which is not ideal for children.” Their story was just one example, but it aligned with the industry-wide trends we’d found, and was worrying enough that we discounted the private-equity option.

So where is our son going? Remember that slightly dungeon-like place? Our first visit was during naptime. The lights were off, which accentuated the center’s subterranean feel. We went back a second time, when the kids were wide awake. Daylight trickled in through the high windows, and the atmosphere was raucously alive. There was banging and singing and colorful hand-print paintings all over the walls. Sure, it was a little messy, but then again so is our son. He’d fit right in.

But what clinched it was reports from other parents. By all accounts the staff were consistent, the faces familiar. No, there wasn’t a science room. But our son can’t even walk yet, so who needs one of those anyway?

This story was originally featured on Fortune.com