Investors Start to Care for Day Care : Growth Predicted Due to Increase in Number of 2-Career Families

The day-care business is no longer kid stuff.

That, at least, is the view of investment experts and day-care center operators who met this week in Newport Beach. Day-care companies, they say, are on the verge of a boom.

The main reason for the upbeat outlook is that the growing number of two-career families has created a seemingly inexhaustible need for day-care centers. At the same time, many working parents who once wouldn’t think of entrusting their children to a for-profit day-care chain have warmed up to the idea.

Opportunities for day-care companies look particularly good in California, said Michael Connelly, a managing director of Lepercq, de Neuflize & Co., a New York investment firm that has already purchased day-care operations in New Jersey and Pennsylvania.

California “is a very mature market,” Connelly said. “The providers have been around a long time and have sorted themselves out. And child care is much more accepted here among parents than in other parts of the country although the rest of the country is catching up.”

Statistics tell a big part of the story. Nine million children under age 6 have working mothers, a number that’s expected to rise to 12 million by 1990, according to the U.S. Census Bureau.

Carol Evans, publisher of Working Woman magazine, notes that in the past 10 years the number of working mothers has risen to 21.5 million from 16 million and 78% of working mothers have full-time jobs.

With that kind of potential demand, investors are betting that there is money to be made by offering high-quality, high-cost day-care centers for affluent parents. Once considered a service largely for the poor, away-from-home day care has become a widely accepted alternative for middle- and upper-middle-class families.

Investment firms such as Lepercq see opportunities to put together day-care chains by investing in or acquiring cash-hungry independent firms. Lepercq has already invested $3 million and expects to invest up to another $9 million next year on child-care facilities around the country.

A few large chains already have tapped Wall Street investors. The investment banking firm Drexel Burnham Lambert has raised $300 million for Kinder-Care, the nation’s largest chain. So far, however, big day-care companies have had mixed results, and some have diversified into fields unrelated to day care.

The business remains fraught with problems. For one thing, day-care advocates often resent the demands of their financial backers.

“They put in their money and then they own you,” said Sheri Senter, owner of Irvine-based Step by Step, a chain with five day-care centers and big expansion plans. “They want to be out (of the business) in four to seven years with a 40% profit. I’m not willing to sacrifice quality. We’ve been able to strike a balance between altruism and business.”

Senter also criticizes the supposed “production line” approach taken by industry giants Kinder-Care and La Petite Academy Inc., which have been called the McDonald’s of day care.

Investors see problems in the business, too, particularly in getting liability insurance. As part of the 1986 Tax Reform Act, tax credits were eliminated for insurers that provide coverage to day-care centers and other businesses with high liability risks.

In September, American International Group dropped its liability coverage of La Petite Academy. Although AIG did not cite its reason, several experts have speculated that the decision was based on the change in the tax law.

Investors also find that day-care centers are highly labor intensive, suffer from high staff turnover and operate on extremely thin profit margins.

Despite those pitfalls, some investors insist that the day-care industry will eventually provide lucrative returns for chain operations. The large chains now account for only about 4% of the total day-care centers nationwide, according to the National Assn. for the Education of Young Children.

Currently, the for-profit child care industry has revenue estimated at from $1 billion to $2.5 billion a year. It sees enormous potential for growth, however, in the $12 billion that Americans spend annually on all forms of child care, according to Roger Neugebauer, publisher of Child Care Information Exchange in Redmond, Wash., and the sponsor of this week’s Newport Beach seminars on investing in day care.

Investment banker Connelly calls Step by Step a model day-care company. To begin with, by concentrating its centers in affluent areas such as Newport Beach and Anaheim Hills, Step by Step has been able to command premium rates.

Step by Step’s tuition runs from $4,000 a year for child day care to $6,000 for infant care. It also provides supplemental classes in such areas as music and dance for an additional charge. The sale of specially designed toys provides further revenue.

The company’s first center, at the site of a closed elementary school in Newport Beach, now has as full enrollment of 150 children. Step by Step opened its second school by converting a church convent at a cost of $75,000. Both schools are profitable, although the company overall is still losing money.

The company--which Senter opened in 1985 with $125,000 of her own money--has seen its revenue grow to just under $2 million this year from $780,000 last year.

And for all of her skepticism toward the role of big investors in day care, Senter clearly is comfortable in the worlds of both business and education. She explains that her centers’ curriculum is derived from Montessori schools and the research of the late Swiss psychologist and child development expert Jean Piaget.

In the next breath, however, Senter discusses “the fill rate,” the 12 to 18 months it typically takes to fill up a school with students and make it profitable.

“The key is getting your clients--the children--in quickly,” said Frank Hodgson, Step by Step’s executive vice president.

“By aggressive marketing, we’ve been able to shorten the fill rate and our break even point considerably,” Hodgson said.

THE DAY-CARE BOOM Day-care centers in Southern California, by county (as of Oct. 1): Los Angeles: 2,264 San Diego: 820 Orange: 723 Riverside/San Bernardino: 557 Santa Barbara: 355 The number of day-care centers in California, as of Oct. 1 of each year. Source: Community Care Licensing Division, California Department of Social Services