What are the most important issues facing private equity firms interested investing in the for-profit education industry

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December 22, 2009

I think it is finding those firms who understand the current postsecondary climate and have a plan for addressing the various concerns the sector faces as a whole. More specifically, there are some serious issues with retention and completion initiatives across all postsecondary institutions. Regarding the for-profit sector, the DOE is going to attempt to legislate stricter regulations if student loan default rates maintain current levels. There is a move afoot by the DOE to include a ‘gainful employment’ rule, which would force for-profits to adhere to a standard tying degrees earned to a result in employment that would ensure student loan payback. There is enough of a conundrum with retention issues and the DOE’s heavy handedness of the for-profits could be disastrous. With regard to the public sector, the problems are just as serious. With tax revenues dropping, there are faculty layoffs and furloughs, courses being dropped, and students being turned away from schools. But alas, the Obama bucks will save the day! We’ve all heard about the American Graduate Initiative, where Obama and his administration are seeking to fund $12 billion to Community Colleges to graduate 5 million students over the next 10 years. By the way, for-profits are noticeably absent from the mix, although they do a better job at graduating students. Is it possible the government is now trying to do away with for-profits by socializing education further? So, I think there are opportunities that private equity firms should look for in the above relative to retention and degree completion. Too many students are heading back to school that are ill equipped and under-prepared in many ways. There are some firms out there addressing these issues. The key issue is to find those who have a pulse on the problem and who are in development of real solutions. Happy holidays! Paul

Bruce, over the last year I have had consultations with over 35 PE firms, some with indepth knowledge of the EDU industry most with no more than a big fund & surface industry information. I would say many PE firms should spend more time and bring in more experienced people to help them really learn about the EDU market, it’s been around for over 100 years and it changes rapidly. I also believe that many firms who are flushed with funds swing too fast with the wind and the flavors of the month, and do not take the time to plan a detailed strategy for the sector rather than just buying something to be in the game. I think that clearly some get it and are building profitable long term enterprises within segments of the sector but most move a little too fast. In addition I agree with what “the Doc” had said at the BMO conference about what scares him about the EDU industry being inexperienced & inadequate management being thrusted in power as the result of the frenzy in EDU and making headline type mistakes which may sour the milk for the rest of us.

 Hello Bruce: In my role as a broker for career colleges, I deal with PE firms every day. Many want to enter the Ed space. I think it is critical that they employ, pre-purchase or shortly after, an experienced operator of career colleges. I actually find that most PE firms are trying to be well informed and want their investment to be sound and successful. They have a healthy respect for default and 90-10 challenges facing the for-profit sector. On the other hand, most want to exit the space in 5 years of so, thus they don’t have a tremendous amount of time to develop the company over a long period of time. An experienced operator will help them avoid making a critical mistake in the name of quick profits. It is that raised profit that will be important when they take their investment to market in the future, thus allowing them to “hit a home run.” Also, more “home runs” experienced in the sector will shine the spotlight on the industry, and the numerous detractors will use the extraordinary profits and gains as a weapon against current operators. Sad, but true. The detractors (ex. Maxine Waters, et al) won’t let the facts get in the way of their pursuit. The facts support continued support of the for-profit sector.


Hello Bruce, Great question, thanks for posting. I have consulted with several private equity groups that made an investment in the for-profit higher education industry. First, private equity groups with experience in for-profit education investment tend to do a better job with the following: 1. Selecting the right investment; 2. Conducting due diligence; 3. Hiring the right management team and 4.Understanding what questions to ask before, during and after the deal has closed. A private equity group that comes up short in its appreciation for the complexity and nuance of for-profit education may end up in a “money pit” (especially if it gets any combination of 1-4 wrong). That said I agree with Bruce and think we should expect stricter regulations from the US-DOE. Specifically, the 12-safe harbors are in potential trouble from the DOE’s Negotiated Rulemaking committees. The profit motive in higher education can work quite effectively if managed with tight internal controls. For instance, the manner in which benchmarks and goals are established, communicated and managed makes a world of difference. Get this part right and you succeed or fail on your merits. Get it wrong and you create (as I mentioned above) your own money pit, or worse. I have concluded that private equity groups investing in for-profit higher education should be prepared for a more hands-on approach to understanding the business and monitoring its management team. One critical issue facing new investment in for-profit education is the market itself. Shifting demographics over the next decade indicate a reduction in qualified students with the ability to pay and an enormous growth in academically and financially challenged students. The ability to deliver on alternative scheduling, delivery models and even alternative pedagogical models may distinguish those with the greatest market share. Increasing societal diversity, academic remediation, job placement and alignment between educational cost and salaried result (by program) are issues that will continue to rise and present challenges for new and existing institutions and investors. Best of luck!

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