By G. Patrick Pawling
Something amazing is happening in squalid, tin-roofed slums around the world. It is a movement — a rising up of hope. Incredibly, one of the main characters in this story is capitalism.
The story of this movement is told in part by James Tooley, the noted English professor of education policy. In his book, "The Beautiful Tree," Tooley writes of his extensive travels through the poorest parts of India, Latin America and Africa in search of ways to help the poorest of the poor through education. One day he came to speak with a father who lived in Kibera, Kenya, the largest slum in Africa, a place with half a million people crammed into corrugated iron and cardboard huts.
As Tooley tells it, this father had sent his daughter to the public school on the edge of the slum because the government — to great cheers from former president Clinton and well-meaning celebrities like Bono — made public schooling free. But the father soon became disillusioned. The classes were huge; teachers weren’t showing up. Not much education was happening.
Tooley writes about a heartfelt conversation with the girl’s father: “He had an understanding of economics that would have warmed the heart of Milton Friedman. He told me, ‘If you go to the market and are offered free fruit and vegetables, they’ll be rotten. If you want fresh produce, you have to pay for it.’”
And there you have it – the heart of the matter. At that moment, Tooley began to believe there might another way to fund education. Amazingly, the evidence was coming not from ivory towers, but from the most humble origins.
What he found: Some of the poorest people in the world were paying tiny for-profit companies to educate their children, even when there were free alternatives nearby. And it was working. It continues to work, across America as well as the rest of the world. For educators and investors, the implications are profound.
At the center of the movement in the U.S. is philanthropist and higher education entrepreneur Michael Clifford, a trumpet player who chose professional music over college. Clifford may live comfortably in San Diego, California, but he has found the same formula for success as the entrepreneurs Tooley encountered: provide a good and convenient education at a fair price and they will come – and so will the profits.
“When I discovered Tooley, I instantly felt a connection with those remarkable for-profit school owners,” said Clifford.
Clifford has shown an uncanny ability to spot potential for investors in the for-profit higher education market for the last 15 years. The secret, he says, is “Compassionate Capitalism.” He calls this framework for success his Four Gospels of Higher Education:
1. Full & Equal Access – Giving every student who is willing to make the required effort the opportunity to acquire a quality college education.
2. Affordable – Lowering tuition and fees so the focus is on getting an education, not financing an education.
3. Timely & Relevant – Facilitating faster completion with lower debt and equipping graduates with relevant, real-world skills.
4. Purposeful & Ethical – Equipping graduates with a strong ethical moral compass and the motivation to give back to their communities.
Key to Clifford’s financial success is his ability to recruit the best management available. The senior leadership positions he has successful recruited include both CEOs for Grand Canyon University (LOPE on the NASDAQ): founding CEO Brent Richardson and current Executive Chairman and current CEO Brian Mueller, formerly President of Apollo. Andrew Clark, founded Bridgepoint (from a predecessor Clifford founded) and as CEO built it into one of the finest institutions in the world. Another remarkable partner/leader is Suren Naidoo, CEO of Clifford’s holding company, SignificantFederation.com. Naidoo is Clifford’s choice for most talented CEO in the education sector. In fact, Clifford has filled out entire management teams in the C-Suite for some of the most successful institutions operating today, recruiting over 200 key management leaders in the last eight years.
That may explain why, while other for-profit higher education companies in the U.S. are being accused of abuses, Clifford’s institutions have steered clear of trouble. Yet they have also been extremely rewarding for the investors selected by Clifford, offering some of the best returns across any portfolio.
Clifford was the catalyst behind Grand Canyon University’s initial public offering, the most successful IPO in 2008 – even topping Visa. Grand Canyon is the only private university in the state of Arizona with tuition significantly lower than in-state tuition at state schools. While an excellent investment, Grand Canyon continues to focus on providing a great educational experience. It is budgeting $60 million a year on the development of dorms and classrooms; it has also won many awards for its academic quality.
Clifford also helped found the predecessor to the most successful IPO of 2009 – Bridgepoint Education, an institution whose mission statement specifically promises to tackle issues such as affordability, transferability of credits and online convenience.
The lesson for wealthy family offices
Those who share Clifford’s values – helping the world through the power of “compassionate” capitalism – can take heart in Clifford’s success. Unlike traditional private equity or venture capital entrepreneurs who are often only interested in short-term returns, Clifford has proven it is possible to simultaneously improve the world and portfolios. The secret, he said, is recruiting superior management teams with a proven record of creating value while maintaining the public trust. That is why he says he welcomes the increased scrutiny regulators are now giving for-profits.
“It’s driving out investors who only care about short term returns, and what we’ll have left are institutions that will make significant money because of their service to students, faculty and staff,” he said. “It’s about being able to put in place superior and ethical management teams that understand the Public Trust.”
“Soon,” Clifford said, “our government will come to the stark realization that the Department of Education needs to fill a critical political vacuum: At the moment we have no policy agenda to encourage the development of a modern workforce. That is something our institutions can fulfill efficiently. We know how to train people for good jobs – work that lifts people and our economy.”
Globally, a promising and potentially very profitable future
Even with the Department of Education’s recent changes to the rules for qualifying for federal student aid, which could hurt some for-profit colleges, some analysts believe there is a huge global need for for-profit higher education. One factor is supply and demand.
Few colleges anywhere, including in the U.S., understand the global market potential – and fewer still are equipped to serve it. International students are very desirable because they pay with cash, so they are not a burden to the American taxpayer-funded student loan programs.
They are clamoring for reasonably priced, on-line based higher education programs – particularly if they are based in the U.S., as Clifford’s are. This untapped market is a focus of schools in which Clifford has influence. His colleges have the IT infrastructure, teachers, and business talent already in place to serve this huge need.
In fact, their ability to serve these market needs is already proven. Grand Canyon University for example, has grown from 700 students seven years ago to 50,000 at present – with more growth projected. Bridgepoint has shown similar growth as well, from 300 five years ago to over 50,000 students now. Globally, it’s reasonable to believe that opportunity could be multiplied by a factor of ten. While for-profit higher education is small in the U.S., it is non-existent around the world. The takeaway: Global for-profit higher education is a huge opportunity for companies that know how to leverage it.
To meet this demand, governments in, for example, China and India will have to turn to for-profit entrepreneurs –it is the only logical answer. The same thing happened in agriculture, manufacturing and healthcare and soon it will happen in education. The difference is that in this case, U.S.-based education is exportable. We can do it ourselves and sell to anywhere in the world while creating well-paying “green” jobs in America.
Need is strong domestically as well
The domestic market shows a desperate need for quality education at a reasonable price as well. Nowhere is this more apparent than in the best deal in higher education, community colleges. Nearly a third of community college students were unable to enroll in one or more classes last semester because they were full, according to a national survey. Budget cuts in California may force the community college system there – which serves some 2.75 million students – to turn away about 350,000 applicants next year.
The reason: Community colleges depend heavily on state money, and states are being forced to reduce budgets. Disturbingly, some education experts are recommending community colleges limit their enrollments, rather than determine ways to deal with market demand. Fortunately, Clifford’s private schools are well positioned to handle this growing demand for high-quality, affordable education.
When we talk about protecting the public trust, that’s exactly what we mean,” said Clifford. “When a private company experiences a surge in demand because it is doing things right and people want more, is that a problem? No, it’s an opportunity. But here we have some education experts who want to tell students of all ages, “Sorry, there’s no room at the inn.’ That’s not right, and we have a better way.”
Our military veterans are rejoining civilian life at the rate of over 200,000 per year, which will increase as the wars wind down. This will also drive demand. According to Citi analysts, the total benefits obtained by military service members increased 120% to $3.2 billion in fiscal year 2010, mainly due to the introduction of the post-9/11 GI Bill. Clifford’s schools are the lowest-cost degree-granting schools for the military when Tuition Assurance (guaranteeing same price for entire degree) is included.
Nursing, one of the focal points of Clifford’s schools along with MBAs, continues to show a strong need. According to the American Association of Colleges of Nursing, U.S. nursing schools turned away nearly 55,000 qualified applicants in 2009 due to an insufficient number of faculty, clinical sites, classroom space and budget. Yet the Bureau of Labor Statistics believes more than 581,500 new RN positions will be needed through 2018.
How is demand for adult learning like that going to be filled? Not only through conventional schools.
“We will begin to see more and more public/private partnerships as the state systems see a drying up of their traditional sources of funds such as donors, alumni and property taxes,” said Clifford, whose company, SignificantFederation, continually works to identify opportunities in this area. “This efficient model of management by for-profit schools will prevail as global demand continues to grow.”
Vote of confidence from Citi analysts
In a recent report, Citigroup Global Markets analysts gave Grand Canyon and its stock – LOPE, on the NASDAQ – a solid vote of confidence. Citi called it a “top pick” because of its focus on working adults pursuing online Masters or higher degrees in high demand education and healthcare fields. Citi also gave the company good marks in the ethics department, saying, “We see LOPE as having very low regulatory concerns (low default rates, and high repayment rates).”
“Our corporate mandate is to continually lower tuition, which will open the door to lift people around the world out of poverty,” said Clifford. “As we do this, our online courses can tap into millions of people from India, China and Brazil who desire a U.S. regionally accredited degree. Plus this will create more jobs in the U.S., including faculty, support staff, technology services and everything else that goes into running a modern college.”
Adds Clifford, “It’s a win for everybody, including people with the financial savvy to become Compassionate Capitalists – the global citizens who want to do good while they’re doing well.”