The Decibel - Why investors are flocking to the daycare business

Episode Date: February 6, 2023

The federal government’s $30-billion pledge to bring daycare costs down to $10/day and to create 250,000 new spaces by 2026 isn’t only attracting families, it’s also getting attention from investors. As the government seeks to make more spaces, for-profit centres are quickly expanding to meet targets.The Globe’s Dave McGinn, and The Globe’s independent business reporter, Chris Hannay, explain the appeal and why child care advocates are concerned.Questions? Comments? Ideas? Email us at [e-mail]

It's been almost a year now since all provinces and territories signed up for the federal government's national childcare plan. The $30 billion commitment aims to get daycare costs down to $10 a day by 2026. But right now, there are more kids than spots in daycares. So the other part of the plan is to create more spaces. 250,000 more. To get there, the federal government included for-profit daycare centers in the deal. And that has led to private equity firms and institutional investors trying to get in on the business of daycare.

The Globe's Dave McGinn and our independent business reporter, Chris Hanay, have been looking into what's going on. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Chris, Dave, thank you so much for both joining me in studio today. Thank you for having us. Thanks for having me. So I know both of you guys are familiar with the daycare system because I believe you both have kids in the system or you just used to have kids in the system. Is that right?

I had two kids in child care and I was actually on the board of their non-profit child care center for the entire time that they were in care, which is a very eye-opening experience. Okay, Dave, so you do have, you have an inside look into this world as well. And Chris, you still have kids in daycare, right? Yes, I have one kid in daycare. Okay. So Chris, you recently spoke to both parents and workers at a daycare, right? Yes, I have one kid in daycare. Okay. So Chris, you recently spoke to both parents and workers at a daycare center in North Toronto that was recently bought by another company. And according to the people that you spoke to, within 24 hours of that change, things were kind of thrown into a turmoil. What happened? Yeah, so I spoke to some parents and former staff at

a daycare in Toronto called the North Toronto Early Years Learning Centre, which had been kind of in the north end of Toronto for many years. And the old owner decided to sell it. And it was bought by a company called Lullaboo Nursery and Child Care Centre, a rapidly expanding chain of daycares in the GTA in southern Ontario. And when they came in, Lullaboo imposed what it normally does across its network very quickly. First thing, almost right off the bat, they gave new contracts to staff, some of whom had been there for years. The person who was actually the director, the most senior employee, had been there for about 18 years. And the new contracts were kind of the standard contract that Lullaby

gave its employees, which offered a base salary of $15.50 an hour, which is Ontario's minimum wage, which was more than a few dollars less than what some of the educators there were already earning. And the new contracts also did some things that some of the staff were not happy about. It forbid them from taking any kind of outside employment, which coupled with the low salary was a major financial burden. And it also said that it could change many aspects of their jobs at their discretion, such as moving them to any of their other locations in the network. So if you imagine, maybe you move to a neighborhood

because it's near your place of employment, and suddenly your boss tells you, hey, I need you to report to duty in Brampton tomorrow or next week. That's totally life-changing for someone there. That's like really, you can see why it's throwing people into turmoil. Yeah. Yeah. So ultimately within weeks, almost the entire daycare staff quit and the director, the former director ended up suing for constructive dismissal over that. Parents were not happy about this whole turmoil. And I would imagine staff are a huge reason of why parents would choose a daycare, right? These are people who are spending time with your kids the whole day. So you want to trust those people. You want to know those people.

Yeah. And so a lot of the parents did try to stand up for the teachers. You know, within days, 50 parents signed a joint letter to the new owners telling them, well, a quote, we cannot stress strongly enough how vital the current teaching staff is to the operations of the school in our community. We fully support and stand with our teachers. That's just one line in the letter. But they wanted to make very clear that they love the teachers. And ultimately, when a lot of the teachers left, a lot of the parents went with them. And this sounds like a pretty drastic response, obviously, to this change. What did the company do in response to all of this? Well, some of the email correspondence was shared with me between the parents and the owners. I mean, at one point in early December, the owners

did admit that they made a mistake in their handling of the contracts with the educators. There is, as I mentioned, there is a court case going on that the former director is suing them for constructive dismissal. And in that response, the owners said that the staff actually loved the new ownership and that it was increasing their morale. That sounds like a very different story than what you heard from other staff and parents there. Yes. So, Chris, this is the story of what happened with one daycare company. Why is what happened with Lullaboo and this specific center,

why is that important to the broader conversation, though, about the daycare industry in Canada right now? Well, part of this is about the kind of rapid expansion that the federal and provincial governments are trying to create in the childcare industry. You know, there's been for years sort of chronic complaints that there haven't been enough spaces and that fees are often too high. And so different levels of government have been trying to work both to make it more affordable and to create new spaces. But one of the challenges can be that in this rapid expansion and with a lot of new government money coming into the sector, there can be a lot of companies trying to take advantage of that to quickly scale their businesses. Dave, I want to bring you into the conversation here. When we're talking about Lullaboo, like a corporation coming in and doing this, we're

talking specifically about for-profit daycare. And in Canada, depending on which province you live in, there's a mix of for-profit and non-profit centers. Can you just give us a bit of the lay of the land here, Dave? What is the general percentage of non- nonprofit versus for-profit across Canada? It varies across provinces and territories. So, for example, in Ontario, about 70% of licensed spaces in the province are nonprofits, while 30% of licensed spaces are for-profit operators.

In Alberta, it's almost about the opposite. More than 60% of licensed spaces in that province are run by for-profit operators. So it is different across the country, but even at 30%, that's a lot of for-profit operators who we need to incorporate into a national childcare system, right? If we're going to create the spaces needed under this plan, we're going to create the spaces needed under this plan, we're going to have to include for-profit operators. And it is in the name, but just generally, what is the difference between these two types of centers?

Well, one, I think it's important to note that while there are troubling stories, such as the one Chris reported, not all for-profit operators can be painted with the same brush, right? I do think it's fair to point out that there are some of them that I'm sure offer a very high quality of care and take care of their employees very well. But on the whole, non-profit care tends to offer a much higher quality of care than for-profit operators. When it comes to the quality of care difference

here that you're talking about, Dave, I mean, is this just anecdotal or do we actually have evidence that shows us there's a significant difference here? Yeah, there have been studies and there's one 2005 study in Canada that looked at more than 300 centers across the country and that was a mix of both for-profit and non-profit, found that on average, non-profits are more likely to hire trained staff, they're more likely to pay higher wages, and they're more likely to have more educators per number of kids in the room. There was a study in Britain last year. Britain, much like Canada, also provides a large amount of public money to both for-profit and non-profit operators. And that study found that when it comes to for-profits, most of them are backed

by private equity. And when you look at where their money goes, most of their money goes to paying down debt that they've incurred through private equity, and very little of it goes to paying staff wages. It kind of says it right in the name, as you said, when you're looking at larger corporations, again, when you look at studies, they tend to favor money over quality of care for children. You know, it's a harsh conclusion, but that seems to be what the studies suggest. Okay. So if there's extra money, essentially, this is going to the company, it's not going to be kind of reinvested or spent extra money on the center itself. Right. And again, Chris's story is a good example of not what typically happens, but what often happens in that if you run a child care center, your largest expense is the staff.

Right. Probably 80 to 90 percent of your earnings or your costs are your staff. So by a huge margin. By a huge margin, right? And so if you are looking to maximize your profits, the way to do that is to pay your staff as little money as possible. And that's terrible because it leads to a high degree of turnover. And as Chris has said, what makes a child care center good most of the

times is the staff, right? And you want staff consistency. High staff turnover is not really good for kids. It's not great for families. And it doesn't seem to provide a very high level quality of care. That would be a big concern about this trend then if we're talking about this happening where there's more for-profit centers, there's a lot of things that people might be concerned about then. I think people are very concerned about where public money is going in the creation of a system, right? This is a very bold plan. This is $30 billion of federal money over the next, what, five years. This is the federal government's $10-day child care plan. $10-day program to create a national child care program.

And so I think, fair enough, people want to know where that $30 billion is going. We'll be back in a moment. Chris, I'm going to throw this one to you because I know you've done a little bit of work on this. The government plan was announced, we should say, in their 2021 budget. So that was it's almost two years ago now. How exactly have private companies and investors responded to that? Yeah, well, one of the things that both Dave and I have heard from people in the sector is some expressions of interest from private equity investors and researchers in the sector.

I spoke to one daycare operator recently who was telling me that they knew of at least 15 of their friends who also operate daycares who had been getting expressions of interest. It's hard to know necessarily who the ultimate buyer is because sometimes there's kind of brokers or third parties who will sniff around for opportunities and not necessarily identify who the buyer is. So when you're saying expression of interest, so that's somebody looking to buy that daycare. Yes. Somebody reaching out to a daycare owner and saying, hey, that's a great daycare you've got there. How much do you think it's worth? But even before all this started, one of the largest daycare chains in the world is actually Canadian owned, which I suspect a lot of people don't know, called Busy Bees. It's actually based in the UK, but the majority owner of it is the Ontario Teachers Pension Plan. Oh, interesting.

Teachers told me that when they bought it, it was about 230 locations, and it's now over 900 centers around the world. As a general rule with private equity buying, they tend to have more sort of short to medium term interest. You want to buy a company, make whatever changes you can to make it profitable, and then flip it to someone else in five to seven years, or take it public, or find something out some other way to monetize it. In the case of teachers, they have held on to it for almost a decade now, but there was a report in Bloomberg a couple months ago that teachers was perhaps trying to shop around Busy Bees. The number that Bloomberg quoted was about $5 billion. For the sale of it?

Yes. Wow. Yeah. I asked teachers about it. They told me that while we cannot comment on a potential sale, we regularly consider opportunities to monetize all or a part of our ownership of our private investments. Okay, so this really illustrates the point that there's money to be made here, and people are starting to recognize that.

Yes. It isn't entirely a new phenomenon. There have been some examples in the past. So one of the biggest ones was in Australia, a company called ABC Learning that sort of in the early 2000s started to buy up a lot of daycare centers in the country and eventually was listed on the Australian Stock Exchange even and valued at billions of dollars. But again, with this kind of acquisition model, company tends to build up a lot of debt in order to be able to purchase all

these centers. Ultimately, ABC Learning kind of went bust during the early days of the Great Recession in 2008, because their debt, they just couldn't handle the huge amount of debt that they had. And ultimately, I think the Australian government actually had to partly bail them out to keep childcare centers open while it was going through receivership. It's since been broken up and sold to other operators. Okay. But that's an example to think about for sure. Dave, the federal government is looking to create more daycare spaces across the country. And this is part of the plan as well, right? If we're going to have $10 a day childcare, we actually need spaces for kids to go. So this is a crucial part of the plan. Chrystia Freeland, the Deputy Prime Minister and the Finance Minister, she said in an

interview with CBC two years ago, and here I quote, I think we should have a strong bias towards not-for-profit care and the not-for-profit system, end quote. So if that's the goal of the government, why are for-profit companies getting in on this? A lot of provinces have put targets for expansion on how many for-profit centers will, spaces will be created and how many non-profit spaces will be created. So in Alberta, I think they're aiming to create something like 60,000 new spaces by 2026. And of those roughly 20,000 will be for-profit spaces and the rest will be non-profit spaces. So the government has put certain caps on things specifically because they want to prioritize non-profit creation. The concern amongst child

care advocates though is that there's going to be so much pressure on building the system because parents are now you know able to access really affordable child care and so they're going to want a lot more of it and with that pressure the for-profit sector will be the ones to say, hey, we're in a position to fill these spaces, right? We're the ones who can get this done really quickly. So how about we change those limitations on the targets to allow more for-profit spaces? A lot of for-profit companies and the kind of investors getting in just have more money. There's all sorts of fields that private equity has gone into over the decades. And at the end of the day, they just have, their whole goal is we have lots of money to

spend on things. Whereas a lot of not-profits are harder to set up. And also, I mean, a not-for-profit, if it wants to expand to say a second location, isn't going to have a lot of money lying around. What do advocates think the government should be doing? Some advocates will tell you that there should be no expansion whatsoever of for-profit care. That the for-profit operators that were in existence in 2021 and 2022 when this deal got rolling should of course be rolled into the program, but they should not be allowed to expand whatsoever. There are other advocates who will tell you, you know, we need them in the system, but transparency here is key, right? Where is the money going? Because the real concern amongst them is that we're going to see

situations like the one Chris has reported on, where people are treated not so well, pay cuts happen, parents are not happy, there's huge staff turnover, and it just does not produce a high quality childcare system. This conversation is making me think a little bit about what happened with long-term care in Canada, which is something we've been talking about for a while now, because there's a similar system there with non-profit and for-profit places. And especially during the pandemic, we saw a crisis in the for-profit centers in particular when it came to the lack of quality care for people. So this kind of makes me wonder, are we setting ourselves up for a similar situation here with daycare? I think there are deep, deep worries

about applying the profit motive to childcare. And I think we saw the worst case scenario of that in for-profit elder care during the pandemic. This is a huge effort of system building over the next several years. And as it progresses, provinces and territories will be submitting progress reports to show what they're learning, what they're doing, where money is being spent, where spaces are being created, numbers being hired. So there's going to be a lot of information sharing. There's going to be a lot to learn. What I will be paying attention to, in particular to what we've been talking about today, is how the for-profit lobby aims to expand under the current frameworks and how they might try to influence changing those frameworks to their advantage. So Chris, we started off talking

about Lullaboo and what was going on there. What do we know about the company? Are they planning to continue their expansion? Yeah, in January 2022, they opened their 11th location in Mississauga. Actually, Ontario Education Minister Stephen Lecce and two progressive conservative MPPs helped them open that location. So that was number 11. And they've publicly said they hope to have 25 locations open within about two and a half years. So that would be more than doubling within a few years. They've said publicly they want to fulfill 5% of Ontario's new childcare spaces,

which is 86,000. So there will be a lot to watch in Ontario as all these new centers are built. And as the province tries to reach that goal of adding 86,000 new childcare spaces. Chris, Dave, thank you so much for both taking the time to talk to me today. Thank you. Thank you. Before you go, a quick update. Last week, we talked about the controversy around the Liberal government's proposed gun legislation. The amendments on the bill were targeting thousands of guns, many of them used by hunters.

Well, on Friday, the government announced a major reversal, that they're withdrawing those amendments. The legislation will go back to its original version targeting handguns. Public Safety Minister Marco Mendicino indicated that they would try another time to prohibit assault-style rifles. That's it for today. I'm Mainika Raman-Wilms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Kasia Mihailovic is our senior producer, and Angela Pichenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow. you