Private Equity investors target universities

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21 oktober 2011 | Tens of thousands took to the streets during the recent anti-banking protests. Meanwhile, private equity companies discover their interest for European private universities. Will higher education become privatized? Unlikely, says ScienceGuide columnist Francois Therin.

In his White Paper on education, David Cameron setthe tone for future British education. Part of it was that privateuniversities will play an increasingly important role. Hisconservative government, however, does not seem to be the onlyparty with increased interest in for-profit institutions. Privateequity companies have recently targeted a number of universities inthe UK.

Private equity companies use a lot of debt to finance takingover a business for a limited amount of time to finally sell it ata profit. Will this lead to the privatization of higher education?Francois Therin, designated Dean of the School of Business ofCurtin University Sarawak in Malaysia, says no. “The potentialnumber of targets is very small,” while investors cannot simply cutmassively on spending.

Private equity does not pose a threat

A recent information surfaced that private equity firms are lookinginto acquiring a number of mostly British universities. This wasfollowed up upon by an article in the T.H.E. last week. I believethat this should not be seen as a threat. Past experience has shownthat private equity investments are most of the timeinconsequential for the private university sector as a whole.

Even though there are no examples of private equity firmsinvesting in significant operations in higher education in Europe,there are cases of individual investors (mostly from the US) whotook over or bought shares in private European universities.

C.E.C., for example, bought a business school in France andanother one in Monaco. Laureate owns an engineering school inFrance, several business schools in the rest of Europe and runs theonline operations for the University of Liverpool from itsAmsterdam office.

Even if we will never get a clear answer from these companies,we can genuinely guess that they are expecting at least a 15%return on their operations. Some of the financials available forC.E.C. for example show that this is more or less what they get ontheir European operations.

Impossible to kill the golden egg layinggoose

The issue, however, is that most of the universities, businessschools or engineering schools in Europe are either public, or ifprivate, not-for-profit. Purely for-profit providers of areasonable and therefore attractive size are very rare. They weremostly built 20 to 30 years ago by entrepreneurs who managed tomake a decent living out of them. And most of these private oneshave already been bought by one of the large US players mentionedabove. This means that the potential number of targets is verysmall.

When we look at not-for-profit private universities, we see thatthey mostly follow a business model similar to the ones of publicuniversities: the spending is adjusted to the expected amount ofrevenues. It means that they are very far from the expected 15%target of most investors and mostly entail returns between 0 and7%. They are consequently rather unattractive investmentstargets.

We could argue that investors might cut costs, rationaliseactivities etc. to reach the 15%. But as these potential targetsare facing a very fierce competition to attract the best students(keep their rankings, reputation and accreditation), they generallytend to use all the resources available to retain top faculty, fundresearch, and spend on marketing. Any significant cuts couldtherefore have important consequences for revenues in the long run(Killing the goose that lays the golden egg).

It is not surprising that the large US private investors havemostly targeted second or third-tier institutions with little or nointernational reputation. These institutions are not attracting thebest students, but the ones who want a degree anyways. Suchuniversities are able to afford investing less on research andfacilities while employing more part-time faculty. This allows themto maintain a better financial profile.

Of course, we may see in the future that a European privateinstitution is bought over and successfully revamped (= becominghighly ranked and very profitable), but the current marketconditions are not suitable for that.

Francois Therin, designated Dean of the School of Businessof Curtin University Sarawak in Malaysia, ScienceGuidecolumnist