Saturday, March 03, 2012

Evaluating Opportunities in For-Profit Education

I attended a seminar, hosted by EducationInvestor, a trade journal specialising in For-Profit Education investing, yesterday. The diversity of attendees was interesting: There were people from Private Equity, education providers looking for capital injection, few potential trade buyers and even David Hughes, the Chief Executive of NIACE, the charity doing pioneering research in various areas of education and learning. 

Overall, a very interesting afternoon, which reconfirmed my views about the excitement around the For-Profit education. However, there were also some new insights to be taken away. 

I felt the investor community isn't still sure about the For-Profit Higher Education opportunity. There is huge premium being paid for degree granting institutions, and as a happy coincidence, it was announced at the event, Montague Capital closed the deal for College of Law, a Not For Profit degree granting institution, on the day. The strategy generally seemed to be to create a cluster of institutions, with one degree granting institution at the core perhaps. However, as one in the audience pointed out, since there are only very limited number of private institutions in Britain which can grant degrees, and too much money will be chasing these institutions, there is every possibility that a bubble may form and one may end up paying too much for the privilege of degree awarding power.

However, how much value the degree granting power will bring is not clear. Though this seems to indicate a level of freedom and flexibility at the surface, the government is not writing blank cheques to private institutions, at least, not yet. The charter to grant degrees will be reviewed every five years, so even the degree granting capability remains susceptible to changes in political climate. Also, it has to be maintained at a huge cost. It is already being argued that the For Profit universities don't do enough research to justify the labelling and this debate is likely to intensify in future. It should be clear that private universities will not do much research, because it is not part of their business model. The raison d'etre of For-Profit education is to meet the surging demand for higher education as mass higher education takes hold in every society. However, research will always be seen as central to what the university does, and will be a key factor in getting degree-granting status. However, this is at best a distraction for institutions which wants to make money by teaching; at worst, the fetish about degree awarding power can destroy value and render some of these institutions meaningless.

I also think the private equity is missing a trick on assessing the For Profit education opportunity. The For Profit Higher Education companies in the United States are very profitable, but their business models may not be replicable. Part of this is timing issue: At a time of austerity, the fact that these institutions receive a lot of public money has generated quite a bit of debate. This is coming to Britain: The favourite slogan of the detractors of private education has been that this will mean diverting the money required at the nation's public universities to private providers and allowing them to make a profit, which is unlikely to be very popular. The General Secretary of the National Union of Students (NUS) has already warned the government of an 'NHS Moment', he was referring to the angry public reaction to the plans to divert money from National Health Service (NHS) to private providers, and a scandal involving a large back-to-work training company, A4E, has dominated the national news in the last couple of weeks. The balance sheets of US For Profit Higher Ed clearly reveals that the university status isn't very profitable if the public subsidies are removed from the equation; the investors in Britain can hardly count upon receiving much public money over a sustained period of time.

And, finally, degrees are about prestige, and I am not sure private equity's time horizon or expectations are in line with what will be required to create that prestige. One is possibly talking about multitude of decades here. But, most importantly, prestige, as it is currently construed, is all about selectivity, and the mission of private colleges - that of serving the middle income middle ability non-traditional students who can't usually make it to the top universities - is at odds with the quest for selectivity. Again, this is one area where we do not have an existing model - Harvard may have prospered as a private college, but it was from a different era - and creating prestige required to make the degree award meaningful is surely outside the private equity's planning horizon.

Indeed, the alternate model of For-Profit colleges offering degrees from a public university has its downside. It is dependent on the changes in the university's political climate, as the overnight decimation of University of Wales' network of centres have shown. However, one can avoid such trouble by choosing one's partners carefully and doing what's needed to keep the partnership healthy and trusting. However, such relationships can have huge upside: A close and trusting relationship can let a private college take advantage of the university's prestige, maintain the flexibility of awards and yet avoid the attendant costs. Accepted that nation's top 30 universities may not want a relationship like this at all, but the universities at the middle tier are perfect for the opportunities private colleges are pursuing.

In this context, one can contrast two private colleges in Britain, Greenwich School of Management and London College of Accountancy, which, at one point, was pursued by the same private equity fund, Sovereign Capital, at the same time. Finally, Sovereign decided to buy GSM over LCA, primarily because GSM had more local UK students (and the student visa changes were meant to affect them less) as a proportion of their student population (while LCA had more students). LCA had a close and long standing relationship with Anglia Ruskin University, and was able to create courses, such as Bachelor's degrees which can be delivered over two years instead of three. GSM had a relationship with Plymouth University, which is higher ranked than Anglia Ruskin, and offered their degrees. The other reason for preferring GSM was that they were on the road to degree granting authority, whereas LCA was not there yet. However, at the hindsight, LCA's size and close relationship with the university has played out better: Since the LCA students are sponsored by the university, they evade the visa restrictions, quotas as well as privileges for the students, altogether. On the other hand, GSM, is rethinking whether degree granting privileges are worth the trouble, and whether anyone would want to have the Greenwich School of Management degree instead of a Plymouth degree.

Also, at the center of GSM versus LCA debate was the uniquely British notion of Home versus International student debate. Indeed, the Home students look attractive because there is no visa headache for them. However, they have the option of taking out a subsidised, income contingent, student loan. They are likely to be far more price-aware and demanding than international students. And, finally, the opportunity is far more temporal than it seems: We are currently facing a population bulge but this is likely to level out in 2015. The international student market, in contrast, is growing, and the international students are more likely to attach a premium to British Education and pay more. Indeed, from an educator's point of view, there is nothing more meaningless than the home-versus-international student talk. London Metropolitan University, possibly the most forward thinking university in Britain at this time, has recently stopped using the terms, and common sense will lead everyone in the industry to move in the same direction. Private equity needs to wake up to this changing marketplace: The premium should be paid for international partnerships and innovation, rather than home students.

Overall, it is clear to see that this is a business with huge possibilities but no entrenched player and tried-and-tested business model. My takeaway from the seminar was the excitement about the huge innovation opportunity there is: It is not the biggest, the most established or the most powerful, but the one most adaptable, nimble and innovative that will win in this industry. I left assured that we are in the right race.

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