Primed With Private Equity, Early Education Poised For Expansion Further Into Retail

Motivated by billions in pandemic-era federal spending and a basically limitless pipeline of demand, private equity firms have turned their attention to childcare. The $60B industry is expected to grow to $83B by 2030, led by chains that have streamlined processes and access to the money flowing into the space from the private sector.

These chains, which are able to leverage their financial position into more attractive facilities and better-paid employees that draw in parents, are poised to grow, filling up smaller retail spaces often found near struggling malls or in sparse strip centers.

“There may be some new folks investing in the space because they see that it's a popular asset. And I do think we'll see growth, but not necessarily brand-new developments, considering that the cost of construction and land ends up being pretty pricey,” said Northmarq Senior Vice President Milo Spector, a net lease specialist who has been involved in the sale of nearly 100 early education properties.

Private equity firms started investing in earnest in childcare, or early education, as the industry prefers to call itself, after the pandemic laid bare the severity of the need among the American population.

With schools operating remotely and many activities like after-school sports or other recreation shut down, working parents found themselves scrambling for childcare. Paradoxically, the pandemic led to the shutdown of swaths of independent providers, swelling waiting lists and raising prices at the facilities that remained.

Childcare is a wildly fragmented industry, including for-profit chains with hundreds of locations, independent local operators, nonprofits and public facilities. This makes comprehensive data difficult to come by, but estimates show there are roughly 500,000 childcare facilities across the U.S. The national chains, which include names like KinderCare, La Petite Academy and Bright Horizons, serve as many as 1 million children under age 5 in the United States.

Chains can operate with annual profits between 15% and 20% of revenue, The New York Times reported in 2022.

“Private equity likes this space because it’s so resilient,” Goldman Sachs Senior Research Analyst George Tong told the NYT.

Childcare is commonly referred to as one of the more durable retail tenants because of the service-based nature of the business and the necessity of the facilities relative to other service providers such as nail salons or boutique gyms.

The prospect of growth in the early education sector comes at a time of recovery for smaller retail properties as a whole. The U.S. retail real estate market ended 2023 at 5.3% vacant, the lowest rate since 2007, according to Cushman & Wakefield, which tracks neighborhood, power and strip centers.

Even as consumers have kept spending on retail goods and services, driving demand in the sector, new retail construction has been constrained by higher interest rates and tighter lending standards. For the first time in years, Cushman & Wakefield reports, the retail market is at a point of being supply-constrained.  

At the same time, demand for early education is being driven by a number of factors, including the slow rebound in the number of children aged 5 and under since coronavirus vaccines became widely available and couples started feeling more secure about the future.

The percentage of mothers, who remain the primary caregivers in most families, in the workforce also remains high. The labor force participation rate for women with children under 6 years old was 66.5% in 2021, and the rate for women with children under 3 years old was 64.2% in the same year, according to the Commerce Department. 

“There has been some successful growth by private equity where they've successfully brought in new systems, new curriculum or new ways of operating to grow companies to expand access,” said Hinge Advisors CEO Kathy Ligon, who specializes in buying and selling early education businesses and their real estate.

Early education chains bring growth potential that attracts yield-motivated private equity. In 2022, Rockbridge Growth Equity made an investment in The Nest Schools, an operator of 36 early education centers in the Southeast, Texas and Ohio. 

“In a relatively short amount of time, Nest has grown to become one of the top 50 largest early education providers in the country,” Rockbridge partner Ziv Weizman said in a statement at the time of the acquisition. “Parents today value high-quality early childhood education, and we see abundant opportunities to expand into new markets.”

Earlier this year, private equity firm Avathon Capital announced its acquisition of Magical Beginnings Learning Centers, a regional network of early education facilities in Greater Boston. 

Private equity investors already have a major stake in the industry, with some of the largest chains, including KinderCare, Learning Care Group, Goddard School and Primrose Schools, controlled by private-equity funds. Bright Horizons was once private-equity controlled but is now a public company.

Learning Care Group has over 1,075 locations nationwide and KinderCare has more than 1,500 centers, as well as before- and after-school programs.  

Bright Horizons went through some right-sizing in 2023, shrinking its locations in the UK, but maintains 1,050 locations in the U.S.  

 During the company's most recent earnings call, Bright Horizons Chief Financial Officer Elizabeth Boland said the company is focusing on places where demand is consistently high.

Bright Horizons, as well as KinderCare and the Learning Care Group, did not respond to queries from Bisnow regarding their growth plans.

“Every company has a growth strategy along multiple lines, whether they're private equity or not,” Ligon said. “A combination growth plan that would include acquisition of existing schools, and of underperformers and new construction, to expand their services in markets that they're already in, but also where they see the need for expanded services, moving into new geographic areas that are underserved.”

But even though private equity is keen on childcare as an investment opportunity, the industry still carries risk. Serious labor shortages and public funding shutoffs threaten prospects even as demand remains high.

“Childcare is kind of a crazy market,” said Zero to Three Senior Director of Federal Policy Patricia Cole, whose organization advocates for access to early education. “It's a market that doesn't work when you don't have public funding. Parents consistently report difficulty finding care, especially for infants and toddlers. We have reports of waitlists and childcare deserts where there just aren't any programs, or there are very few programs for young children.”

The American Rescue Plan Act provided $24B to stabilize early education during the pandemic, but the program expired in late 2023. Congress has yet to provide any additional funding for the industry, though there are proposals kicking around.

In January, for instance, Rep. Eleanor Holmes Norton, a Democrat representing the District of Columbia, proposed a bill to provide federal funding for states to provide prekindergarten programs for every child regardless of income, a policy goal currently supported by the Biden administration. A similar early education entitlement was in early versions of the Build Back Better Act, but it didn’t make it into the final version.

Under the Biden administration's FY 2025 budget proposal, released on Monday, families making less than $200K per year would be offered subsidized childcare, with the lowest income families paying nothing.

Early education is exceptionally popular as a public policy goal, with a large majority of voters saying that it is important for such education to be accessible and affordable. Actually translating that into policy, however, is tough, especially at the national level.

And while public funding is largely considered necessary among those in the early education industry, some are pushing back against the entrance of private equity into the equation. 

The presence of these funds could lead to decisions being made with the bottom line in mind rather than what’s best for children, Capital Senior Fellow Elliot Haspel argued in a column for The Hill last year. And their involvement can impede public attempts at funding, he wrote.

“And as The New York Times reported, the interest group that serves several large chain programs actively lobbied against comprehensive childcare legislation in the Build Back Better Act,” Haspel wrote.