KinderCare just became a publicly traded company. Can this solve the childcare shortage? (Video)

Preschool education provider KinderCare (KLC) appeared on the public market on Wednesday. The IPO came at the right time, as the high costs of childcare have received attention in the run-up to the US elections.

KinderCare, the largest private early childhood education provider, debuted under the ticker “KLC” on the New York Stock Exchange at $24 per share. The price was at the lower end of the expected range of between $23 and $27 and valued the company at $2.75 billion.

KinderCare shares rose 16% in the first week of trading to reach $28 on Friday.

CEO Paul Thompson told Yahoo Finance that the company was “very pleased” with the current situation and said it was “focused on the long term”, with growth on the horizon for the organization.

Wednesday marked the second time the company wanted to make a public debut; it had previously withdrawn IPO plans in 2022. Following the IPO this week, Swiss private equity firm Partners Group still retained a controlling stake in the company, with a stake of around 70%.

KinderCare generated $2.5 billion in revenues, $102.6 million in net income and $266.4 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in fiscal 2023.

The company plans to use the proceeds to pay down debt. As of June 29, the company had $1.5 billion in outstanding debt, plus $104.2 million available for borrowings under its credit facilities and outstanding letters of credit of $55.8 million.

“The majority of the proceeds from the IPO will go toward paying down debt,” Thompson said. “That was an interest of ours to get our influence where we wanted it in a public marketplace.”

Despite the favorable response in its first week as a publicly traded company, not all investors are sold on the stock.

New Constructs founder and CEO David Trainer is skeptical about KinderCare, telling Yahoo Finance by phone that investors should “at least wait for it” but that they “probably never want to get involved in this.”

“It seems like they’re quite unprofitable and also very expensive stocks,” Trainer said, raising concerns about the amount of outstanding debt the company holds. “We see a company with very high debt… It looks like a private equity bailout.”

The competitive landscape in child care

According to S&P Global Ratings senior analyst Carlee Martineau, all child care providers have benefited from increased occupancy due to high demand for child care and supportive care.

KinderCare is the largest private child care provider in the U.S., with 2,000 early childhood education centers creating the capacity to care for more than 200,000 children. Thompson noted that KinderCare has “a lot of opportunity” to serve more families outside the 40 states and the District of Columbia where it operates today.

However, the child care business faces a lot of competition from local community organizations that provide child care and others in the public market.

Michigan-based Learning Care Group is the second-largest provider, with a capacity of 160,000, according to S&P Global Ratings. It is followed by Bright Horizons Family Solutions (BFAM), which has the capacity to serve approximately 115,000 children in 1,032 care centers.

Childcare costs have risen enormously in recent years. According to the latest Consumer Price Index, the cost of child care and preschool has increased 6.2% annually, and the Department of Labor recently estimated that child care costs account for about 8% of the average family income.

Still, U.S. demand necessarily remains “supported by favorable economic and demographic trends, such as an increasing number of dual-income households requiring child care,” according to an S&P Global Ratings note to clients. S&P analysts added that there is “increasing recognition of the importance of early childhood education,” but that there is still a “substantial shortage of child care capacity.”

“Affordability is definitely a challenge, because with a good daycare center it can cost around $500 a week to send a child there,” says UBS analyst Joshua Chan. “It’s a product with a higher price tag, and so most childcare chains are likely targeting the higher-income demographic.”

Daycare is ‘twofold’

The approaching presidential elections have put the spotlight on the sector and its crucial role in the American economy.

Several experts, analysts and economists Yahoo Finance spoke to highlighted the ripple effect of a robust childcare network on employment and long-term household income.

Childcare is the “backbone” of the economy, says Wendy Wagner Robeson, senior researcher at Wellesley Centers for Women. “If we want our economy to grow and prosper, you need childcare because if you want men and women and people in your economy to work, you can’t leave those babies home alone.”

As Yahoo Finance’s Ben Werschkul reported, Vice President Kamala Harris outlined a plan to cap child care costs at 7% of working families’ incomes and proposed a new $6,000 tax credit for a child’s first year of life as part of the costs of childcare. -housing plan.

Donald Trump is also considering an expansion of the child tax credit, according to sources, although details from his campaign remain scarce. During his time in office, Trump doubled the tax credit from $1,000 to $2,000 per child.

Still, KinderCare’s Thompson said he doesn’t expect the election to impact the company since the child care industry is “bipartisan.”

Large players like KinderCare are expected to benefit from the expiration of American Rescue Plan Act (ARPA) funding, while smaller providers could face an even greater challenge. S&P said it expects consolidation among child care providers to increase over the next 12 months.

“The COVID relief funding that has really helped the sector in recent years is waning,” S&P’s Martineau said. “We expect in our base case that there will be some pressure on the smaller childcare operators and that these larger operators may be able to acquire additional childcare operators to help grow their base.”

“If you want a thriving economy, parents need to be able to go back to work. Parents need to know that their child is in a safe and nurturing environment,” he said.

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].

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