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It’s easy to see why private equity houses are attracted to investment in essential services such as elderly care, fostering and, increasingly, childcare.
These are not luxuries that can be easily dispensed with during economic downturns, such as the one into which Britain may soon be sliding.
That means your revenue streams are not only predictable – a financier’s fantasy – but part-funded by the taxpayer, about as reliably solvent a customer as you could wish for.
Both main political parties are promising to invest more in childcare, with government proposals – decried as insufficient by many in the sector – scheduled to add an extra £4bn of state support.
As the Guardian has revealed, buyout companies increasingly regard Britain’s childcare market as a golden goose, hoping to replicate a model that has proved profitable in the US.
Profit doesn’t have to be a dirty word, investors say.
Larger firms are better able to weather the economic storms that have capsized small, independent operators, unable to cope with soaring costs, coupled with uncertain income from parents feeling the cost-of-living squeeze.
By buying up nurseries en masse, these companies can achieve economies of scale: It’s much cheaper to buy 10,000 packets of baby wipes than 10, on a per-wipe basis.
Such savings, in theory, fund greater investment in quality of service, or higher wages to tempt carers back into a sector wrestling with staffing shortfalls.
There is good reason to be sceptical. First, profit-seekers’ first duty is to their shareholders, not to society. They have an incentive to prioritise investment in well-to-do areas, where parents can afford the bells and whistles that boost profit margins – more expensive extra hours, for instance, or day trips.
That risks leaving deprived areas facing under-investment and a shortfall in nursery places. A report by UCL, released last year, found that the private equity gold rush did not appear to have led to an overall increase in places, or greater investment in staff.
Concerns linger about the level of transparency offered by privately run institutions, too.
But the biggest spectre looming over the private equity model is debt. Buyout firms borrow heavily to fund acquisition sprees, which typically means substantial interest payments, often paid upwards to an overseas parent company or external lender.
That means that a large slice of the fees contributed by parents – not to mention state funds – flows out of the country rather than into services.
Debt presents a greater existential risk.
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Sam Freedman, a former adviser to the Department for Education, makes the all-too-ominous comparison with private equity investment in residential care for elderly people. That particular adventure resulted in scandal, with the successive collapses of care home groups Southern Cross and Four Seasons, both of which buckled under the weight of their debts.
“We’re starting to see very big networks for the first time, with 300 to 400 nurseries,” said Freedman.“That gets to the point where there’s a huge risk to the state [if one collapses].”
The debt-fuelled private equity model is a high-wire act. A gentle economic headwind is tolerable but gale-force winds can be catastrophic, even for businesses that claim to have stress-tested for the worst-case scenario.
Inflation may push up costs but hopefully interest rate rises don’t inflate the cost of debt. Rates may rise but hopefully parents can still afford to pay fees. Parents stop paying fees but luckily the company hasn’t just embarked on yet another debt-fuelled acquisition.
But what about when it has? When some, or all, of those factors combine, disaster may not be far away.
Some experts recommend replicating the economies-of-scale logic adopted by private enterprise but routed through the third sector. There are several different models for this but all rely on the appetite, imagination and competence at a central government level.
It isn’t clear where that is going to come from.
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