Private equity is reshaping American child care

Subscribe to enjoy similar stories. 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.