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A BrightPath Kids location in Brampton, Ont., on Jan. 26.Christopher Katsarov/The Globe and Mail

Private equity firms and institutional investors are increasingly taking an interest in the daycare industry amid government investment in the sector, a trend that child-care experts say could cause problems unless strict cost-control measures are introduced.

The federal government announced a $30-billion child-care plan in its 2021 budget to create new spaces and subsidize fees, and since then Ottawa has worked out deals with the provinces with the ultimate goal of having fees average $10 a day across the country.

There was already some institutional investment in the sector – most prominently by global giant Busy Bees, which is majority-owned by the Ontario Teachers’ Pension Plan – but operators say interest has grown since the government plan was announced.

Amanda Munday, who operates a daycare and co-working space in Toronto called the Workaround, said she is personally aware of at least 15 other daycare operators in Ontario who have received unsolicited expressions of interest from buyers since late November.

She said she is skeptical of the potential for big payoffs from owning daycare centres because government-mandated staff-to-children ratios mean labour costs will always be significant, which makes it hard to benefit from economies of scale.

“You don’t open a daycare to get rich,” she said.

That hasn’t stopped some companies from going all in.

Busy Bees, one of the biggest child-care chains in the world, is headquartered in Britain and operates in Canada under the name BrightPath Kids.

Dan Madge, a spokesperson for majority-owner Ontario Teachers’, said the fund’s Busy Bees operation has grown from 230 facilities to 900 across 10 countries in the past decade.

He said BrightPath facilities frequently receive high marks in third-party assessments and that compensation is competitive for the industry.

“We remain committed to Busy Bees and continue to see significant potential in the future growth opportunity for the business,” Mr. Madge said.

He confirmed that all of BrightPath’s child-care centres participate in the federal subsidy program.

BrightPath Kids itself did not respond to questions from The Globe and Mail. Neither did Kids & Company, another large chain in Canada.

One point of contention with the government child-care program is whether there should be strict controls on for-profit operators – specifically, how much they can charge and what can be deemed reasonable expenses. Ottawa and the provinces are currently negotiating accountability frameworks for such controls.

Sikandar Atiq, the president of Next Equities, an Edmonton-based venture capital firm that has a child-care company in its portfolio, said any cost-control framework must take into account the fact that daycares have different cost structures.

“We have chosen to take on substantially more costs in our programming because we do things like extracurriculars, we do things like a very nutritious meal plan,” Mr. Atiq said. “We do things like bringing in full-time staff that teach STEM training and teach physical literacy and teach all sorts of different aspects of a more holistic curriculum and educational offering for families. And not to mention we also are in very desirable locations, which obviously come with substantially higher rents.”

But advocates of non-profit child care say for-profit providers often cut costs by hiring as few educators as possible and paying them minimum wage. A transparent cost-control framework that establishes limits on how public money can be used is necessary to ensure the creation of a high-quality child-care system, they argue.

“When child care is not very constrained by an accountability framework, and when there’s a reasonable amount of public money flowing into it, it becomes more profitable,” said Martha Friendly, the executive director of the Childcare Resource and Research Unit, a Toronto-based think tank.

A national study published in 2005 that looked at 325 child-care centres in Canada found that, on average, non-profit centres did better than for-profit ones on measures such as higher wages, staff training and child-worker ratios.

Study co-author Gordon Cleveland, an economist at the University of Toronto, said that when it comes to distributing federal funds under the new child-care deal, transparency must be the top priority.

“We have to know what we’re getting for our money,” he said.

Owning the real estate is one way of maximizing profits, Prof. Cleveland said. He said a private operator could create two corporations – one that owns the assets and one to run the child-care business.

“You lease to yourself, and one of those businesses makes a lot of profit,” he said, which is why rent costs must be part of the accountability framework.

A study published last June in the Journal of Social Policy that looked at government funding of child care in Britain noted that “little is known about how the money paid to companies providing private-sector child care is used.”

To find out, the researchers compared the financial accounts of a sample of medium-to-large for-profit child-care groups, many of which were owned by private equity, with some non-profit providers.

Based on that comparison, the researchers concluded that “for the for-profit companies, a considerable amount of money is being extracted for debt repayment and relatively little goes into staff wages.”

Ottawa has said that the national child-care deal is intended to prioritize non-profit centres. “I think that we should have a strong bias toward not-for-profit care and the not-for-profit system,” Deputy Prime Minister Chrystia Freeland said in a CBC interview in 2021.

But given the plan’s ambitious targets – 250,000 new licensed spaces across the country by 2026 – child-care advocates such as Morna Ballantyne, the executive director of Child Care Now, worry that enterprises backed by private money will leverage those expansion goals.

“If it’s backed by private equity, the for-profit sector is going to be in a much better position to expand and increase supply than the not-for-profit sector. That’s what really worries me, because there’s going to be so much public pressure on expansion,” she said.

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