1 out of every 5 childcare centers in Arizona is private equity-owned

Private equity is buying up a lot of industries these days, including childcare centers. And Arizona is full of them.

Arizona ranked second on the list of states with the highest concentration of private equity-owned daycares in the country, according to Chris Herbst, an Arizona State University Foundation Professor in the School of Public Affairs.

But why childcare?

Herbst and his colleagues are out with a new study titled “Big Daycare: The Growth of Private Equity in the U.S. Child Care Market.”

Herbst said nationally, private equity ownership in this industry has gone up from about 1% in the late 1990s to 8% today. In fact, he found nine of the 11 largest childcare chains in the country are currently or have been owned by private equity firms.

Full conversation

CHRIS HERBST: The largest private equity-owned chain in the country is KinderCare, followed closely by a parent company called The Learning Care Group. They own and operate 11 different childcare center businesses. Some of those include Childtime, Tutor Time and La Petite Academy.

Listeners in Arizona will probably be most familiar with programs like Primrose and Goddard Schools. These are schools that exist in large numbers in Arizona.

LAUREN GILGER: Yeah, definitely see those around. Let’s back up, Chris, and just talk about what private equity is. Like, I think we get this sense that, you know, it’s Wall Street, quote-unquote, but they own a lot of things. Like, there are private equity investors, buyers, owners in many, many industries these days, right?

CHRIS HERBST: That’s correct. So the way that private equity firms operate is they gather funding, they gather money from wealthy individuals and institutions, and they use that money to purchase and, in many cases, manage mature or already existing businesses with the goal of increasing efficiency, increasing profits such that they maximize the short-run returns for their investors.

And it is, in fact, the case that private equity owns today everything from restaurants and shoe stores to nursing home facilities as well as childcare increasingly.

LAUREN GILGER: Yeah. OK, so why childcare? Like, that seems counterintuitive to me. Like, it doesn’t seem like it’s a money-making industry to get into.

CHRIS HERBST: It is a bit counterintuitive, but I think there are some clues as to why private equity is attracted to childcare. Number one, I think it’s important to note that private equity-owned childcare businesses don’t exist everywhere. They exist in very select communities, and that is largely high-income communities where they can charge, not always, but sometimes premium prices to a relatively wealthy consumer base, and that allows them to maximize profits in these communities. So they are profit-driven in childcare as they are in other industries.

The other clue, I think, is that perhaps they are setting themselves up to leverage public dollars in childcare sometime in the future. I think they’re making a bet that childcare nationally will become heavily subsidized, and they’re positioning themselves to take advantage of those public dollars in the future.

LAUREN GILGER: That’s interesting. We’ve seen that happen just next door in New Mexico, yeah.

OK, so you talked about the neighborhoods, the kind of communities these places tend to pop up in, but what about in certain states? It sounds like Arizona is at the top of the list you found.

CHRIS HERBST: It is certainly the case that private equity is not everywhere, and it’s concentrated in a relatively small number of places. So the top sort of four or five states in which private equity has a presence in childcare are Nevada, Arizona, Colorado, Virginia, North Carolina, Georgia and New Jersey.

In Arizona and in Nevada, one out of every five childcare centers is private equity-owned.

LAUREN GILGER: Wow.

CHRIS HERBST: I will also say just to sort of speak to the geographic clustering of these businesses, 82% of U.S. counties does not have a single private equity-owned childcare center.

LAUREN GILGER: The vast majority, OK.

CHRIS HERBST: The vast majority; 75% of all private equity-owned centers exist in just 5% of all U.S. counties.

LAUREN GILGER: Wow, and apparently here.

CHRIS HERBST: And here. As a state, there are a large number of these sorts of providers, but they are not scattered throughout the state. They exist primarily in Maricopa County and close to Tucson.

LAUREN GILGER: OK, so you mentioned they tend to be in sort of higher-income communities. What does that mean about what kinds of programs these are? Like, should parents avoid them, should they look for them, are they good, are they bad?

CHRIS HERBST: Well, I think the most important comparison we make in the paper is the difference in quality between private equity-owned centers and non-private equity centers. And the story here is a bit mixed.

So on the one hand, private equity-owned centers are more likely to be accredited through state-owned quality accrediting bodies. They’re also more likely to be accredited by a nonprofit organization called the National Association for the Education of Young Children, and they run what is sort of the gold standard quality accreditation program. So private equity, more likely to be accredited by these bodies.

It is also the case that child-to-staff ratios across PE and non-PE centers are about the same, so they’re not doing worse on that metric. On the other hand, we do find evidence that things like staff turnover rates and child turnover rates, which are seen as being important components of quality, that private equity firms do worse on these things. So staff turnover is higher, child turnover is higher in these PE-backed centers.

And again, we think that this is correlated with quality for the sort of obvious reason that the more churn there is on the client side and the teacher side, that this sort of undermines quality in childcare classrooms.

LAUREN GILGER: Yeah, interesting. So this also comes, Chris, as there’s been a big increase in the cost of childcare around the country, here as well for sure. I think every parent knows that. Are these things related?

CHRIS HERBST: We conclude that overall private equity is, generally speaking, not the reason why childcare is so expensive in this country. Because their presence is very localized, as we spoke about, for the average community, private equity is not driving up your children’s childcare costs.

We conducted a direct comparison. We look at what private equity is charging relative to non-private equity, and we find that private equity does in fact charge substantially more. But when you conduct the comparison against non-private equity chains, it is actually the case that private equity childcare centers charge slightly less than non-private equity chains.

LAUREN GILGER: OK, so not a cost factor in that way.

What about regulation here? Like when it comes to private equity Wall Street investors, quote-unquote, buying up other slices of the pie, right, when I’m thinking of housing in particular, we’ve seen people suggest, the president included, that that needs to be reined in. Is that happening in childcare?

CHRIS HERBST: Not so far, although discussions, I think, are underway to try to rein in private equity. My colleague and I on the paper, I think, conclude that if you’re worried about private equity in the childcare market, you should probably also be concerned about chains, national chains, writ large, because we find that the behavior of private equity really sort of mirrors broader trends within for-profit chains. And so maybe there’s a conversation to be had about regulation as it relates to chains. It doesn’t seem to us to make a whole lot of sense to target regulation specifically at private equity.

LAUREN GILGER: That’s interesting. So it’s sort of become a boogeyman in a way, but maybe it’s not any worse off than some of these major chains in terms of actual quality.

CHRIS HERBST: I think that on average that observation is correct, although the story is complicated. They seem to do better on some dimensions and maybe slightly worse or the same on other dimensions.

LAUREN GILGER: Yeah. OK, Chris Herbst, ASU Foundation professor in the School of Public Affairs at Arizona State University joining us. Chris, thanks so much for coming in, thanks for the research here, appreciate it.

CHRIS HERBST: Thanks for having me.