By Mitch Leventhal and Ina Tang

In our first article, we briefly described the industry sectors comprising the Eduspace.  We divided the industry into six (6) sectors and seventeen (17) subsectors. In this installment, we are going to focus on the sector which is most associated with the industry in popular consciousness –Institutions and Schools.  To better categorize this sector, we have further divided it into four (4) subsectors, distinguished by level of instruction:

Early Education and Childcare

This subsector consists of businesses that provide early education and childcare.  Examples include Brightside Academy, Acelero Learning and Childtime Childcare.

K-12 Schools

K-12 schools provide classroom and/or online instruction to school age students.  These compete with the public education system, and tend to serve a specific demographic group such as dropouts, high achievers, religious students and the affluent who opt out of the public system.  Examples of K-12 schools include the Avenues World School, Educational Services of America and Camelot Education.

Charter Schools and Charter Management Organizations

Charter management organizations are for-profits or non-profits that run and manage publicly funded independent schools.  Many of them have received private money from nonprofit ventures that invest philanthropic capital in education.  Some representative charter management organizations include Achievement First, KIPP Schools, and Rocketship Education.

Higher Ed Schools

Higher Ed schools are nationally or regionally accredited, private, for-profit institutions that offer education beyond high school, such as vocational schools, trade schools, and degree granting institutions. Examples include Capella University, DeVry University, University of Phoenix, Laureate Education and Education Corporation of America.

Of the 266 U.S. private equity firms that we identified as of July 2013, 161 have made investments in Institutions and Schools.  Some of the most active firms in this sector are specialized nonprofit investment ventures such as CharterSchool Growth Fund, NewSchools and Silicon Valley Social Venture Fund.  CharterSchool Growth Fund, as indicated by its name, specializes in charter school investment. This fund has 40 companies serving more than 160,000 students in its portfolio.  For-profit funds in this sector, ranked by number of education investments, include Providence Equity Partners, Quad Ventures, Sterling Partners, Palm Ventures and Leeds Equity Partners.

Based on our examination of publicly available sources, these capital providers have together invested in approximately 200 institutions and schools. Among companies receiving funding, higher ed institutions dominate the interest of equity investors.  This should come as no surprise, given the enormity of the for-profit higher education industry and its global growth potential.  Charter schools and related management companies come in second, as more investors focus on improving public education.

Although Institutions and Schools currently constitute the most popular sector for investment in the Eduspace, we are not very optimistic about its future.  For-profit higher education continues to face regulatory challenges and structural changes, which have chilled investor interest.  As online learning becomes more prevalent, and as ‘MOOC mania” advances, students have increased options to take courses from renowned non-profit institutions rather than from for-profits.  Public K-12 does offer significant profit potential, but not from institutions and schools themselves.  Profit is more likely to derive from service providers that offer curriculum, educational software, and student assessments.  To attract potential investors, institutions and schools will need to be uniquely innovative while working on building a strong brand and lowering costs.

@ 2013 Mitch Leventhal and Ina Tang

By Mitch Leventhal and Ina Tang

In an era of tight budgets, institutional leaders in higher education (and post-secondary) are increasingly pressured to improve operational efficiency and reduce expenditures.  To this end, colleges and universities are tapping into private sector vendors to provide ancillary services which had once been delivered in-house, ranging from bookstores, administrative software solutions, distance learning technologies, marketing and student recruitment.

This post-secondary sector is enormous. The National Center for Education Statistics reports a total of 4,706 institutions in 2012, serving 21 million students in the United States. This sector – excluding the network of ancillary service companies which it supports – has over $400 billion in annual revenue. The enormity of this industry has attracted high profile investors into the for-profit college sector.

As outsourcing has become more widely accepted, investor attention has started to shift toward companies that provide ancillary services to both traditional and for-profit higher education institutions. But unlike for-profit schools, educational technology companies and MOOCs which have received intense media attention, less glamorous companies which provide back-end and support services to schools, colleges and universities have largely remained out of the limelight.

Our study of private equity companies and their eduspace investments has started to clarify the role of private equity in this ancillary services sector, which we are calling the Higher Education Services (HES) sector. Three types of HES companies are dominating the interest of equity investors at this time.

First, marketing and recruiting solutions.  Colleges and universities are increasingly driven to increase enrollment – both domestic and international – to meet financial goals, but global marketing and recruitment, in particular, has high costs and requires specialized expertise. All but the most elite institutions must resort to private sector providers to serve their global recruitment needs.  And some institutions, which formerly serviced their own needs in-house, are finding that specialized firms have the ability to perform the same tasks better, and at less cost, thereby freeing up resources for other strategic needs.

Earlier this year, New York-based private equity fund Leeds Equity Partner invested over $100 million for 25% of INTO University Partnerships Limited, which enters into long-term contracts with universities around the world to increase student capacity and support greater mobility for international students.  This large bellweather investment signaled the seriousness with which informed investors consider the education services industry.

Second, higher education administrative solutions.  These companies provide administrative solutions to colleges and universities and are flourishing because they enable schools to forgo or cut back on their information technology services or infrastructures, which are very costly. These costs are particularly onerous for smaller institutions which have limited bargaining leverage and who have difficulty achieving economies of scale.

One example of such an investment is Ellucian. In 2011, Hellman & Friedman, a leading private equity investor in the vertical software and information services industries, acquired SunGard Higher Education businesses from SunGard Data Systems Inc. for an aggregate cash purchase price of $1.775 billion.  The private equity firm combined SunGard Higher Education with Datatel, an existing portfolio company, into a new company, Ellucian, which offers administrative along with other technology solutions to higher education institutions. Ellucian now has over 2,400 institutional customers in 40 countries.

Finally, distance learning solutions. These companies provide institutions with the technologies, infrastructure support and resources to transform their existing courses for online delivery. Some colleges find the need to offer their courses online to reach a broader audience as online degree and certificate programs become more popular. Others – the State University of New York, in particular – are initiating strategies to use distance education to accelerate and improve completion rates for traditional students. Still other institutions are experimenting with MOOCs, or massive open online courses, to extend their reputations globally, while generating foreign exchange earnings. Institutions pursuing these strategies work with service companies such as Echo360, The Learning House, and Academic Partnerships to convert their traditional programs into an online format and market them to appropriate constituencies.  These service companies have all successfully raised capital from private equity investors.

The flow of private equity into the HES sector is an acknowledgement and affirmation of the rapidly growing trend of outsourcing higher education support services. Faced with declining budgets, colleges often find efficiencies by focusing on their core missions rather than managing business processes.  They outsource units that fail to provide the level of service needed, provide the service at too high a cost, or cannot adapt to changing market conditions, such as the globalization of higher education.  Given that colleges and universities are searching for more innovative, cost-effective and sustainable ways to deliver their services, it is imperative that entrepreneurs and investors work together to create solutions that will benefit the higher education sector.

@ 2013 Mitch Leventhal and Ina Tang