Private Equity: The Red Herring in Child Care Policy Discourse

By Art Rolnick
Associate Economist, University of Minnesota
Former SVP and Director of Research, Federal Reserve Bank of Minneapolis

Child care is a high‑stakes industry that sits at the intersection of working‑family economics, child development, and long‑term national competitiveness. Yet the sector operates under a chronic shortage of public resources that far outweighs any questions about who owns the facilities. When we focus on ownership structure—whether a center is nonprofit, for‑profit, publicly traded, or backed by private equity—we divert attention from the real levers that determine quality: adequate, sustained investment in well‑trained staff, low child‑staff ratios, evidence‑based curricula, and safe, stimulating environments—the elements of good care.

 

The Funding Gap Is the Real Crisis

Consider the most recent data on the Child Care and Development Block Grant (CCDBG), the primary federal vehicle for assisting low‑income families. In fiscal year 2024, fewer than 13% of eligible children received assistance, and in 17 states the program reached 10% or fewer of those who qualified. Despite modest recent increases in CCDBG funding, the number of children served fell from 1.7 million in 2010 to just 1.3 million in 2021—a decline of roughly 24% over a decade. These figures are not abstract; they translate into waiting lists that stretch for months, families cobbling together patchwork care, and providers operating under severe financial strain.

The funding shortfall extends well beyond the federal level. State pre‑K programs, while growing, still serve only a fraction of three‑ and four‑year‑olds, and many rely on per‑child rates that fall significantly below the true cost of delivering high‑quality instruction—which includes providing fair wages, ongoing professional development, low child‑staff ratios, and evidence‑based curricula. Local municipalities, already strained by competing priorities, are unable to fully supplement these gaps. As a result, providers face persistent pressure.

Providers frequently employ a range of strategies to sustain operations:

• braiding multiple funding sources (such as CCDBG, Child and Adult Care Food Program, state pre‑K, and parent fees);
• pursuing targeted grants for specific needs like playground upgrades or teacher training;
• sharing back‑office services or bulk purchasing with neighboring centers to reduce overhead, adjusting enrollment models (e.g., offering more part‑day slots to increase utilization); and
• investing in operational efficiencies through energy audits or streamlined scheduling software.

While they aim to pursue such alternatives, providers are also often forced to consider raising tuition, cutting quality or closing in the most serious of circumstances. In this environment, debating whether a center’s equity comes from a philanthropic foundation or a private‑equity fund is beside the point—ultimately, quality depends on sustainable resources, not ownership structure.

 

Quality Is Defined by Inputs, Not Ownership
Decades of research—from the Perry Preschool Project to the Abecedarian Study to the more recent Tulsa and Boston pre‑K evaluations—show that the predictors of lasting child outcomes are teacher-child interactions, instructional support, and the richness of learning activities, not the tax status of the operating entity. When centers are able to invest in high-quality learning environments, the returns on investment are substantial. Nobel laureate James Heckman’s meta‑analysis estimates that every dollar spent on high‑quality early learning yields between $7 and $16 in societal benefits, including reduced special‑education placements, higher graduation rates, and increased lifetime earnings. Critically, these returns depend on achieving high quality and can be realized under any ownership structure. When quality is not met, returns diminish regardless of who owns the center – exacerbating an uneven playing field that will impact kids for years to come down the line.

What private equity brings to the table, when the policy environment permits, is capital for scale. Equity investors can finance the construction of new facilities, the retrofit of older buildings to meet modern safety and accessibility standards, and the purchase of age‑appropriate learning materials that individual owners might struggle to afford. In states where funding follows the child—such as Minnesota’s early‑learning scholarship model—private‑equity‑backed providers have been able to expand rapidly while meeting rigorous quality benchmarks. The same capital can be used to raise wages and benefits for staff, addressing a chronic source of turnover that undermines continuity of care. In short, private equity is a tool; its impact depends entirely on the rules and resources that surround it.

 

The Minnesota Example: Funding That Follows the Child

Minnesota’s early‑learning scholarship program offers a clear illustration of how smart public policy can align private investment with public goals. Under this model, families receive a scholarship that they can use at any provider that meets the state’s Parent Aware quality‑rating system, which evaluates programs on teacher qualifications, curriculum, child‑screening, and family engagement. Since the program’s expansion in 2013, participation among low‑income families has grown by more than 40%, and the share of providers earning a three‑star or higher rating has risen from 38% to 62% across all provider types. Crucially, the scholarship amount is calibrated to the actual cost of delivering quality care, ensuring that providers are not forced to subsidize gaps out of pocket. The result is a market where investment flows to those who can demonstrate quality, regardless of ownership form.

Similar dynamics are evident in Virginia, where the Early Care and Education Consortium (ECEC) reports that its for‑profit members serve 31% of children through CCDBG‑supported slots, while in Minnesota the figure stands at 23%. Nationwide, about 10% of children ECEC‑affiliated companies serve participate in CCDBG, even as reimbursement rates often fall short of the true cost of high-quality care. Imagine the gains if we fully funded quality care and tied access solely to verified quality: expanded access, higher teacher wages, and universal high-quality learning that drives strong societal returns.

 

Why Attacking Private Equity Is Counterproductive

When policymakers and advocates single out private equity as a culprit, they risk enacting measures that deter the very capital needed to expand quality supply. Restrictive ownership rules, punitive taxes on profits, or categorical exclusions from public funding streams can drive investors away, leaving a vacuum that neither philanthropy nor the public sector can fill quickly. The consequence is fewer new centers, less renovation of aging facilities, and slower wage growth for teachers—all of which harm the children and families these policies aim to protect.

Moreover, the focus on ownership distracts from the harder, but more effective, conversation about how to structure public investment so that it rewards outcomes rather than ideology. Policies that tie funding to validated quality metrics—like Minnesota’s Parent Aware ratings—ensure dollars go to programs that demonstrate strong teacher‑child interactions, developmental screening, and family engagement. Such approaches also create a clear pathway for continuous improvement: providers know exactly what they must do to earn higher reimbursement rates, and investors can confidently allocate capital to those levers.

 

Policy Recommendations: Shift the Debate from “Who Owns” to “What Works”

1. Increase and Stabilize Public Funding – Raise CCDBG and state pre‑K appropriations to levels that cover the full cost of quality care, indexed to inflation and regional wage growth.
2. Adopt Quality‑Contingent Funding Models – Expand scholarship programs that require providers to meet state‑defined quality benchmarks, with periodic re‑evaluation and tiered reimbursement rates.
3. Simplify Compliance and Reporting – Streamline documentation requirements so that providers of all sizes can easily demonstrate eligibility for public funds, reducing administrative burdens that disproportionately affect small and mid‑sized operators.
4. Encourage Transparent Capital Flows – Require all recipients of public early‑learning funds to disclose how monies are allocated (staff wages, facility improvements, curriculum, profit) without imposing punitive caps on returns; transparency builds trust and informs better policy.
5. Invest in the Workforce – Fund wage supplements, loan forgiveness, and ongoing professional development for early educators, addressing the core driver of quality and turnover.