The for-profit education sector has taken a major public beating in recent months as accusations of predatory admission practices at several schools have tarnished this high-margin/high growth sector. It certainly doesn’t help that the bulk of industry revenues are generated from the Federal government. Given an increasing number of complaints and allegations of abuse, new regulations are being proposed to reign in offenders. Hedge fund manager Steve Eisman likens the mess to the subprime mortgage crisis and is calling the situation his next big short.
So what does this mean for those private equity firms invested in the education sector? Well, any firm holding a post-secondary institution must be somewhat troubled. If regulations are imposed and the negative publicity continues to cast doubt on the value students receive, growth must slow and any strategic still interested in acquiring will undoubtedly offer less for those with concentrated Federal revenue.
Current portfolio examples include Housatonic Partners’ Alta College (2002 investment), Wafra Partners’ American Higher Education Development Corp. and Great Hill’s Anthem Education Group.
Given the size of and numerous other education related sub-sectors to invest in (corporate training, publishing, test prep, specialized schools), the high margins and low capital requirements of education related opportunities will continue to interest private equity groups – however, until things are sorted out, just not those businesses where the government is writing the check.