00:00Westin: As parents, our children are priceless, which means that any value attached to them or their well-being cannot be enough. But there is a business built around early child care, with consumers and suppliers setting prices based on revenue and costs, and even investors putting up capital on which they expect a return. – I was kind of like at my wit’s end. At the end of 2024, I had taken a break from real estate because I was like, “I don’t know how to do this without full-time childcare.” OK… And I just remember opening up my journal and the first thing I wrote down was like, “Find childcare.” And I was like, “I don’t know how to do this.” The eggs are done now. Westin: Ashley Purdy’s kids are one of roughly 11 million children under the age of 15 who spend time in paid childcare in the United States. – Shoes in the car. – Being home with 3 kids was amazing for a time, but then it was like I would be home just like daydreaming and like fantasizing about going back to work. – Come over here, you hold my hand. Westin: Childcare is uniquely expensive in the U.S., comprising a higher proportion of average income than it does anywhere else in the world. According to Child Care Aware of America, the national average cost for children under school age for one year was $11,582 in 2023, but that cost is only the tip of the iceberg. – This isn’t a gym, right? This is a sector where educators are literally building the brains of young children and providing the care that families rely on to be able to flourish. Westin: Elliot Haspel is a senior fellow at Capita and author of the forthcoming book “Raising A Nation.” – Right now, we see middle- income and upper middle-income and affluent parents using licensed formal childcare, largely that’s ’cause they can afford it or at least try to afford it, and also because those tend to have the highest proportion of families that have two earners in the workforce. Westin: What can be a major challenge for young parents turns out to be a potential opportunity for equity investors. – They take up right now somewhere between 10% to 12% of the child care sector, and they’re growing. At a time when many child care programs are struggling to stay open, the for-profit chains are growing ’cause they’re able to do debt financing, they’re able to access capital markets in a way that the individual programs, nonprofit programs, church-based programs just can’t. Westin: The strong demand for early child care is one way for private equity investors to make money, but there is another potential revenue source: the real estate the centers occupy. – Classic sort of part of the private equity playbook that we know of other sectors is what are known as sale leasebacks, right, this idea that you take a site that owns its own facility or owns the land and basically force it to sell off to another landlord. The profits from the sale go up to the private equity firm as opposed to back into the site. The site now has to lease back the, you know, facility or the land that they previously owned, so they now have a new line of debt. We have definitely seen this strategy play out in childcare. And in fact, childcare real estate is one of the most valuable pieces of sort of assets that many of these chains have. Westin: Adam Newman is founder and managing partner of Tytan Partners, specializing in early childhood education, and he knows the long history. – Some of the first and earliest investors in early childhood education started back in the eighties. The two largest players today, KinderCare Learning and Bright Horizons Family Solutions received investment from private equity firms late seventies, mid-eighties and really served as bellwethers for what has become over the last couple decades, a much more active and vibrant private equity investment community focused on early childhood education. Westin: What about the nature of the marketplace in early childhood education makes it attractive for private equity? I mean, what’s the opportunity? – It is a capital-intensive market that requires a degree of professionalism and investment that oftentimes exceeds what individual owner operators can do themselves. There’s also a fair degree of complexity, particularly as you move across states. What they are doing is taking a fragmented ecosystem and striving to drive efficiency and scale in ways that more independent owner-operators are oftentimes unable to do themselves. Westin: But that’s not to say that private equity plays as large a role in all parts of the early childcare business. At least thus far, investors have been careful to pick their spots. – The part that the private equity world tends to play in are those two middle segments–the national chains and the independent centers. Westin: Newman estimates that the two segments targeted by private equity, national chains and independent centers, account for about 39% of the children in care today, and he expects that portion of the business to grow to about 45% of the total market over the next 5 years. But all that private equity participation is not without its detractors. – There’s a for-profit chain called Guidepost Montessori. And it was–it’s a venture capital-backed chain. And what happened is, they ended up growing so fast, they got way overleveraged. They stopped being able to pay their rent, and they actually ended up having to close over 40 to 50 of their sites in a matter of months. And then the parent company just a few weeks ago actually filed for bankruptcy. Other countries have seen childcare chain collapses. The largest for-profit chain in the Netherlands in the 2010s, which was private equity owned, collapsed. The government had to step in. In Australia, in 2008, the largest for-profit child care company in the world, a thing called ABC Learning, collapsed because it was, again, overleveraged. Westin: On the other hand, those who deal regularly with private equity investments in early childhood care say that in some ways it’s the safest form of investment, as investors will make sure things go right for their own self-interests. – If you think about it, the headline risk for a bad investment in early childhood business is pretty significant. If you think about the LPs that sit behind a lot of these private equity firms, the last thing they want to read about or see is an investment made by one of their private equity firms that has had, you know, a pretty nasty headline because of quality or other concerns. So, in many ways, a private equity owner theoretically should be bringing a greater degree of rigor and attention to some of those issues. Now, the reality is, as some of these chains get increasingly large, you’re still dealing with hundreds of sites, and there is a degree to which you lose control over what might happen at the edges of that network, but that can happen in any environment. Westin: To investors, rolling up child care centers requires careful calculation to stay profitable. But to parents, the math isn’t as important as the care. – Kids are not widgets, kids are not products, and you really don’t see the outcome for years to come. Westin: Becca Balint is now a Democratic congresswoman representing her home state of Vermont. She earlier served for 8 years in the Vermont Senate, including as majority leader and as president pro tempore, where she worked to get legislation passed addressing the lack of adequate childcare in her state. – It’s been a challenging landscape for many years now. We have a confluence of forces that has made it very challenging for us here in this very rural state. So, we have a demographic crisis. We have a lot of elderly folks here in Vermont, not as many young families. You have had a situation, Vermont, where there hasn’t been enough child care slots in child care centers for the number of people that want to go back into the workforce. Westin: In 2023, Vermont passed a childcare bill that provides $125 million of public funding, giving more than 7,000 families access to childcare assistance. – Over the early years of this, you know, 10-year push, we set benchmarks for ourselves, and some of them were very ambitious, trying to get to a solution by 2025. You had champions within the legislature. You had a governor who also understood that it was holding us back, and you had a Democratic legislature, a Republican governor. It was clearly a bipartisan issue. And then we worked really hard to bring in business partners from across the state in all different industries, for them to make the case that this was not just good for the individual kids and their families, it was good for businesses, it was good for the economy. And it’s not easy to raise a payroll tax. You know, you can imagine all of the forces at work there that didn’t necessarily want to go down that road. But we had so many large- scale meetings with so many stakeholders from across the state saying, “Well, what are all the different possibilities that we could look at?” And in the end, that was the one that we felt like in Vermont was the case that we could make because we had so many businesses already on board. That might not be the case in another state or municipality. Westin: A Vermont nonprofit organization estimates that the law will serve as a $375 million boost to the economy when parents are able to enter or reenter the workforce. Vermont’s efforts may be a step in the right direction, but nationally, early childhood education is still a pressing problem for many American parents. Whatever the risks and opportunities in private equity’s growing role in early childcare, for both investors and for children… – Prince and princess… Westin: and their parents… – Uh-oh! Westin: everyone agrees that it’s not the ultimate answer for the lack of affordable care. And it doesn’t address large segments of the population where the needs don’t match investors’ goals. – The portion of the population right now that is probably underserved are not the affluent, but it is probably the bottom two quartiles who are desperately looking for options that are reasonably high quality, but where there’s just a fixed number of seats available at the local public pre-K program or the local Head Start program. So, I think private equity, you know, increases capacity a bit, but doesn’t, I don’t think, fundamentally change solving for the demand that exists out there. – That kind of investment is really looking at short-term gains and looking at solutions that are very much oriented towards the economy of the thing. And I think when you’re dealing with children, those can’t be the drivers. You have kids who are coming from all different backgrounds right now, and it’s critically important that the child care facility, that early education site, is meeting the needs of those kids and their e xperiences as they come through the door. And the experiences of families here in Brattleboro are not gonna be the same as families up in little Fairfax, Vermont, or in Burlington, Vermont. And so, that is my hesitation with believing that the solution is private equity investing in these chains. And I also think it’s not a great solution for rural America, because families want to know the people and the entities that are watching their children. It’s the most precious thing that you have.Stream Schedule:US BTV+
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