Saving U.S. Education

By: Michael K. Clifford

Some would say that the for-profit postsecondary sector is on its last legs … DOA.

Fifteen publicly traded education companies have seen their stocks decline by 33% on average since December 2009 versus a 5% increase for the S&P 500. Media accounts abound of allegations regarding improper practices at publicly traded companies, including marketing misrepresentation and fraudulent reporting of placement rates. Twenty state attorneys general are investigating for-profit institutions. No other sector has been as demonized as the for-profit sector has among state and federal politicians over the past several years.

But, fortunately, these times are a changing. Those regulating the US education sector are increasingly recognizing the benefits of experimenting with entrepreneurial, innovative approaches to improving students’ education experience to address the need for a better skilled workforce. The door is now open for visionary innovators creating student opportunities that hold the promise of better student outcomes at considerably lower costs. This is coming largely from leaders in the often maligned "For-Profit" education sector, who are breathing new life into US education at a critical time when America must retool to compete for jobs globally. And, contrary to some of my colleague’s complaints, I am seeing regulators beginning to reward ethical, innovative school operators.

Based on my experience as an entrepreneur and philanthropist in the space, I believe that more opportunities exist than ever for investors to create real enterprise value while benefitting society.

Higher education in the United States is now a $400 billion industry, serving 20 million students. Some estimate K-20 education to be a $2.5 trillion global business. Currently, most expenditures come from fatigued taxpayers. However, in an environment of increased fiscal austerity by governments worldwide, we are likely to see a vast privatization of the global education sector over the coming years. It is my prediction that for-profit education will exceed 50% market share of all education globally by 2025.

Like others who recognize the power of private capital to transform the education market for the better, I will be attending the BMO Capital Markets 11th annual “Back to School” conference for investors in New York on Sept. 15. Almost 60 public and private education companies will be represented. Two of these companies, Grand Canyon Education and Bridgepoint Education, were founded by my partners and me over the past decade and have grown to over $1.7 billion of market capitalization with less than $64 million invested.

Like last year and the year before, attendees will include entrepreneurs creating disruptive business models to traditional higher education with principles that include remarkably lower tuition than existing market participants, global access, increased academic quality measured by real career-enhancing metrics, more funding for faculty development than nonprofits, and customer service.  Such entrepreneurs partnering with academic experts are able to look beyond the near-term transitional period where the for-profit sector is adjusting marketing practices, with a huge nudge from the government, to ensure that consumers are making the right decisions to go back to the right degree program at the right school. In my opinion, such changes are but a stepping stone to greater dominance resulting in increased market share.

These entrepreneurs have created companies that are leveraging Internet technologies, forming public private partnerships, working with regulators to become better customers of the government, giving visionary faculty the resources to instruct better, and creating real world degrees that enhance careers.

Why am I so confident regarding the sector’s long-term opportunity? Simply put, it has become apparent that our country’s non-profit university system cannot meet student demand. Case in point, the State of California just spent over $1 billion on a new campus in Merced that will serve only 45,000 students. Sounds great – until you know that the state turned away 400,000 qualified applicants this year alone. I doubt that the existing challenges will abate any time soon given state budget crunches, rising pension costs, and intransigent faculty & staff unions. Meanwhile, traditional private non-profits dependent on the old model of alumni donations with dwindling endowments continue to increase tuition to fund existing operations.

Savvy investors who study macro trends get it – they recognize the current system is fundamentally flawed. When parents, taxpayers, and regulators hear that more than 100 non-profit colleges are now charging more than $50,000 a year for tuition, room and board, they inevitably ask “How long can this go on?” Enter the disruptive new model educator innovators who will do well while doing good.

This comes down to classic supply-demand theory – for-profits are filling a void in the marketplace, with the Department of Education focused on regulating quality of education, which is good. This creates a more responsive education services provider that is also accountable with transparent reporting of data. Competition drives choice which leads to reduced tuition prices. All this is good for the student, good for the economy.

Given the prospects for long-term secular growth, we think that investors have an unparalleled entry point to see better-than-average returns driven by scandals at select institutions that have depressed valuations. The good news is that heightened scrutiny has spurred increased regulatory oversight, which has had the benefit of cleaning up the sector from bad actors. Transparent, consistent rules for the industry with greater oversight will help all the stakeholders sort the wheat from the chaff – and these rules will eventually apply to non-profit schools as well. The barrier to entry for these investments just got a lot harder, making well-managed existing schools even more valuable long term.

Net-net, there is no better time than now for investors to follow students’ feet…or fingers.

Clifford, a California-based entrepreneur, has helped set up several for-profit universities such as Grand Canyon Education and Bridgepoint Education.


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