UV Letters

Jun 14, 2013 BACK

A Tale of Two Cities?

Volume III, #12

“It was the best of times, it was the worst of times…
in short, the period was … like the present period…” - Charles Dickens

If you thought the only way in which the French Revolution was like the present period in the higher education private sector was the Department of Education’s “let them eat cake” attitude to the for-profit sans culottes, think again. Because it does seem to be simultaneously the best and worst of times.

It is the best of times for private companies. At April’s Education Innovation Summit, you couldn’t throw a rock without hitting a private company CEO dealing with the high-class problem of too many meetings with prospective investors. We count 50 financings or acquisitions of HE private sector companies in the past year, putting us well ahead of the dot-com peak when 25 HE companies were financed in 1999 (just over 50 were funded from ’95-’00). The past year also saw the emergence of EdSurge, an online news resource that largely serves to cover financings of private education companies in the aptly named KA’CHING section of its weekly newsletter. Articles like “Why VCs can’t afford to ignore EdTech any longer” are appearing in Venturebeat. And then last week, in perhaps a sign of the apocalypse, dot-com era survivor Jason Calacanis announced he is launching a venture fund that will focus on education.

Meanwhile, it is the worst of times for public companies. Enrollments continue to decline due to new mechanisms that filter out marginal students, and to prospective students’ increasing unwillingness to take on debt, particularly to pay for relatively undifferentiated degree programs. Short sellers have made so much money on the sector that they’ve taken a breather, resulting in a recent surge. Nevertheless, as far as investors are concerned the postsecondary public companies remain in critical condition. Many analysts have dropped coverage. Companies like Apollo Group and DeVry weren’t prominent at the Education Innovation Summit. And you won’t read about them in KA’CHING or anywhere in EdSurge. The last mention of Apollo Group in EdSurge was August 2011, when it “plunked down” $75 million to acquire Carnegie Learning. DeVry has never made it. Like many revolutionary figures, they’ve been guillotined and replaced with less unsavory, more charismatic (private company) leaders.

***

During the French Revolution London and Paris experienced the best and worst of times, respectively. But that strange sense didn’t last long. Before too long, liberte, egalite, fratenite et extreme violence washed over Europe. Soon, Paris’ problems became London’s and London restored a more natural order in Paris.

So it will be in higher education; this tale of two cities won’t last much longer. Whereas Silicon Valley edtech companies have garnered headlines and plaudits, for our money the most innovative HE technology is being developed inside the public companies. Consider the fact that Apollo Group has an annual technology R&D budget estimated to be in excess of $100M. Or that Capella now owns SOPHIA, a low-cost provider of online self-paced general education courses and was the first institution to receive HLC’s approval to launch direct assessment (competency-based) programs.

Equally, as the largest online (and some of the largest campus-based) universities, the public companies are far ahead of all other institutions in collecting and analyzing data to gain insights on improving student outcomes. Nearly all traditional colleges and universities are focused on what’s easy to measure (the four Rs: rankings, research, real estate and rah – i.e., sports) rather than student learning and employment. Having never focused on the 4Rs – at least until Grand Canyon joined NCAA Division I – the public companies have been working on so-called Big Data initiatives for several years and are focused on identifying key inputs and variables and devising tactical, just-in-time interventions to improve student persistence and outcomes. This is particularly true for the large online institutions where every click and page view is tracked. Keep in mind that as adaptive learning comes to the fore, the most effective adaptive systems will be those with the most data, constantly judging which learning object to deliver to which student in which sequence.

Moreover, several of the public companies already have significant international experience and operations. DeVry’s success in Brazil is a model for others to follow and Apollo is now chasing a number of markets simultaneously. International expansion requires resources and networks that small private companies will be hard pressed to match. And keep in mind that Laureate – the leader in international HE – still hopes to join the ranks of the public companies by the end of the year.

Finally, these public companies have a great deal of cash – $2.8B in total, or more than the cumulative $2.6B invested into higher education from 1995 thru 2011.

Company Cash
Apollo Group $853M
Bridgepoint $428M
Career Education $288M
DeVry $281M
ITT $210M
Education Management $184M
Grand Canyon $152M
Capella $128M
American Public $121M
UTI $79M
Strayer $51M
Corinthian $44M
TOTAL $2.8B

In fact, there were a few public company CEOs at the Education Innovation Summit. But instead of sitting on industry panels defending their current business models – something they’ve been doing now for over four years – they were outside on the patio meeting with private companies they might want to acquire. The need for new growth engines for their businesses and the amount of innovation occurring at private companies has focused many public company CEOs externally over the past year. Fueled by available cash, these companies are likely to value innovative private companies more highly than financial investors. This M&A activity won’t only include acquisitions. As Fidelis has done with American Public, some private companies will take minority investments from public companies to leverage their expertise and resources while the public company gains an option to acquire the business down the road.

***

In short, if you’re excited about the future of higher education, the changes around the corner and the prospects for private sector involvement, stop being Dickensian in your thinking. It’s not a tale of two cities, but rather a single city. Just as the French survived the Revolution and then a short dictator, the public HE companies survived their own revolution (government/media) and then short sellers. Having done so, these companies are in the midst of figuring out an important role to play in the future of global higher education.

The big challenge for the public companies is that so many of the significant near-term opportunities involve partnership or collaboration with traditional HEIs. That’s where 90% of the students are in the U.S., and close to 100% outside the U.S. But no one wants to be seen out and about with someone who’s just been guillotined. As a result, public companies are poorly positioned for these opportunities. (This is more acute for domestic partnership or service provision opportunities than international. But international is no slam dunk either. Senator Harkin is a minor celebrity at universities on every continent except Antarctica, which still awaits its first higher education institution.)

Public companies need to sequence the many opportunities ahead of them by first focusing on those that don’t involve partnership or service provision to traditional universities. By rebuilding their reputations with successful endeavors that demonstrate they are capable of achieving double bottom line success – student outcomes in addition to financial returns – they will reoccupy prominent positions in an increasingly dynamic – nay, revolutionary – landscape.

University Ventures (UV) is the premier investment firm focused exclusively on the global higher education sector. UV pursues a differentiated strategy of ‘innovation from within’. By partnering with top-tier universities and colleges, and then strategically directing private capital to develop programs of exceptional quality that address major economic and social needs, UV expects to set new standards for student outcomes and advance the development of the next generation of colleges and universities on a global scale.

Comments

- No comments yet. -

Leave a comment

(required; won't be published)