As private equity invests in child care, Colorado lawmakers seek guardrails

This story was originally published by Chalkbeat Colorado.

Last July, families at a Highlands Ranch child care center received startling news: The center was temporarily closing following a visit from the county health department.

The center’s owners failed to submit required construction plans to the Douglas County health department and get construction permits from the county’s building division.

A state child care licensing inspector also found several safety violations related to the construction: emergency exits were blocked by tools and debris, and paint and construction materials were accessible to children.

The renovation was the result of an ownership change: In early July, a national chain called The Nest Schools purchased the center from a small local company. The chain has six child care centers in Colorado — all of which opened after Detroit-based private equity firm Rockbridge Growth Equity invested in the company in 2022.

Some early childhood experts have recently sounded the alarm about the growing footprint of private equity in the child care space. They worry that such investment firms are primarily motivated by outsized profits, not providing quality experiences for young children. But others say private-equity-backed child care is already providing many desperately needed seats and that its deep pockets can help a fragile industry during a challenging time.

Gerry Pastor, co-CEO of The Nest Schools, said in an email that private equity investment helped sustain and grow The Nest, including by making much-needed upgrades costing more than $1 million at the Highlands Ranch center.

He said that while the center tried to keep child care operations separate from construction, “a few unintended issues arose” that were corrected immediately. He said children, staff and families did not use exterior grounds during construction there. He also said some of the allegations that Chalkbeat inquired about “never happened” but he didn’t specify which ones.

A Rockbridge spokesperson had no comment.

Colorado lawmakers are taking notice of private equity’s push into child care. In January, they introduced legislation that would put new limits on private-equity-backed centers in an attempt to temper practices that critics say are harmful, including cutting staff and raising tuition.

“We just want to make sure that as more investors come to the state that they understand they’re coming to the state to invest in high quality [child] care and not simply just to turn a profit,” said state Rep. Lorena Garcia, a Democrat who is sponsoring the bill.

Experts say private equity firms often make swift changes when they invest in child care centers. At The Nest Schools of Highlands Ranch, those changes had consequences beyond construction disruption. The director and assistant director quit within a month, according to letters The Nest sent to parents, and parents said around 10 more staff members also left.

Brooke Aldaz, whose two young children were enrolled at the center, told Chalkbeat she saw problems shortly after renovations on the decades-old building began. She said she became particularly alarmed when she, her 1-year-old son, and his visiting speech therapist were sent to meet in a classroom that had been closed for construction.

“There was broken glass and old dishes,” she said. “I remember being very uncomfortable that it was even suggested that a 1-year-old child should be in that room.”

The Highlands Ranch center reopened within a couple weeks but Aldaz said it was no longer the place she once considered “idyllic.”

Private equity prizes speed and profit, experts say

Private equity firms typically use a little of their own money plus loans and funding from big investors — often pension funds, endowments and extremely wealthy individuals — to buy companies they aim to sell at a profit later.

Elliot Haspel, a senior fellow at the think tank Capita who’s written extensively about private equity in child care, said the private equity playbook prioritizes speed.

“The idea is that you want to sort of wring as much profit as you can, usually over three to seven years, and then you want to ditch it off to some other private equity firm,” he said. “There’s an incentive, plausibly, to go really fast.”

A Chalkbeat analysis identified about 175 Colorado centers currently owned or backed by private equity or venture capital firms — representing about 15% of the state’s licensed child care capacity for young children.

The state’s child-care rating system shows that about 40% of those centers have one of the state’s top three ratings. By comparison, about 32% of all Colorado child care programs overall hold those top ratings.

While state ratings are a starting point for determining quality, they provide only a snapshot because they are awarded once every three years. Highly rated programs can still be cited by the state for violations, put on probation, or fined.

Some early childhood leaders believe private equity-backed centers are meeting a need and that more regulation, as proposed in Colorado, could be harmful.

“I think we want to be careful about implementing anything that is going to hurt an already distressed system,” said Nicole Riehl, president and CEO of the Colorado business-focused group Executives Partnering to Invest in Children. “It’s like paying attention to the nail that’s sticking out of the fence when the fence is laying on the ground.”

Other groups, ranging from the National Women’s Law Center to the Open Markets Institute, have sounded the alarm about the growing role of private equity in child care. A 2024 National Women’s Law Center report notes that center directors in private equity-owned companies report being “pressured to prioritize raising enrollment rates above all other considerations.”

Melissa Boteach, vice president of income security and child care at the law center, said the private equity footprint could expand further as more states pump public dollars into child care and preschool.

“We want those dollars invested in children and the teachers… not going to Wall Street,” she said.

Many states have bolstered public investment in the sector in recent years, including Colorado. Its $344 million universal preschool program, now in its second year, offers tuition-free half-day preschool to all 4-year-olds.

Big-name child care is backed by private equity in Colorado

The roughly 170 child care centers in Colorado owned or backed by private equity firms include big names such as KinderCare, The Goddard School, Primrose Schools and The Learning Experience.

The Nest Schools, which will open a seventh Colorado location this summer, is one of the smaller national chains backed by private equity. Pastor said Rockbridge Growth Equity owns 33% of voting stock in the company.

Chalkbeat identified one child care operator, Guidepost Montessori, that’s backed by venture capital investors, another investor type that Colorado’s proposed legislation would cover. Guidepost announced this month that all five of its Colorado centers will close in March “due to financial challenges.”

Chalkbeat’s tally of Colorado child care centers owned or backed by private equity or venture capital firms is likely inexact. Sometimes, a center’s true owner is hidden by layers of parent companies. In addition, while the state recently started asking centers about their “governing body,” many responded with obscure acronyms, a person’s name or the names of real estate or holding companies.

Mindy Goldstein owns a child care center in Lakewood called The Applewood School. When interest rates were lower, she said she’d get multiple calls a week from private equity firms interested in her center. Some representatives flew out to Colorado to meet with her.

She listened, but never bit.

“I don’t want to sell to private equity, but if I had to, it would be a really fast transaction,” said Goldstein, who estimated her center’s value at about $3 million. “They are the only ones who have money to buy it.”

Colorado considers limits on private equity in child care

Garcia and two other Democratic state representatives have proposed new rules for child care companies or franchises that are owned or partly owned by private equity firms, venture capital firms or other institutional investors.

A watered-down version of their bill was approved in a legislative committee Tuesday. It would require centers to give teachers and families 60 days notice following the acquisition of a center by institutional investors before laying off staff or changing enrollment or eligibility rules.

Among those who testified against the bill this week were Goddard School and Primrose Schools franchise owners and officials from KinderCare and Learning Care Group, a private equity-backed company that runs La Petite Academy, Everbrook Academy, and Children’s Courtyard centers.

Several said they didn’t think it was fair for certain centers to be singled out for additional regulation.

Allison McMurtry, who with her husband owns a Goddard School franchise in Denver, said, “My main concern with this bill is the principle that anything would apply to only a certain ownership structure and not all schools.”

But Haspel, of Capita, said different kinds of child care providers — for example, those who operate out of their homes and those who operate in child care centers — are already subject to different rules.

“This would just build on that as part of good governance, of making sure that you’re protecting the government’s investment in child care and protecting families in whatever type of care they want to choose,” said Haspel, who supports the bill.

Problems at The Nest

Sara Flater’s 5- and 3-year-old were enrolled at The Nest Schools of Highlands Ranch location when the center was abruptly shut down on Aug. 1.

Families were temporarily reassigned to other centers run by The Nest Schools, and Flater’s children ended up at different centers, one in Littleton and one in Centennial, she said.

“It was very chaotic,” she said.