Contrarian investors find unique niche opportunities to make money in recessions. Some of the best financial returns have been generated in down economies. Consider the following concepts for making money in difficult economies:
1. Public Companies — For the last ten years, post-secondary education institutions have experienced above-market frothy evaluations, making an entry point for investors interested in a three to five-year exit highly risky. But times have changed. The public companies like Grand Canyon University, American Public Education, Bridgepoint Education, and others continue to generate enormous cash from their disruptive version 2.0 business models, yet due to the uncertainty of the regulatory environment, their stocks are being punished on Wall Street.
2. Private Operators — Private operators, with low tuition combined with low acquisition relationship marketing models, continue to generate impressive cash dividends for their owners. These private operators stay off the radar screen because they are not public entities.
3. Limited Access — The macro environment informs logic that while some state/public institutions are indeed beginning to try to offer some online offerings, they are limiting access dramatically due to federal and state budget cuts combined with continuingly increasing expenses. This is a trend that I believe will continue for the next five to ten years. Some 400,000 California students were denied access to public education in 2011 due to severe budget cuts, and California just announced that all of their community colleges will be closed for the summer of 2012. Students are irate at access being denied. This was not due to an interruption in any form of student loan programs, Pell, private lenders, or grants.
4. New Environment, New Models — The slowdown in demand by some of the public companies is in direct relationship to their management teams trying to determine how to manage the new regulatory environment, primarily because their business models feature high tuition, high acquisition, low persistence models—which, in my opinion, are dinosaurs.
The new model requires high quality academics, low low tuition, supreme customer service, flex programs between campus and online, relationship marketing for low cost acquisition, and clear paths to employment. Companies offering these key elements are disruptive models and well positioned to take advantage of access being denied by competitors, while demands for a bachelor's degree increase. Regionally accredited schools will be merging with Nationally accredited schools soon, as Regionals offer a higher value proposition long term. This what we are doing at our Version 3.0 www.victory.edu.
5. Value Proposition — Yes, a college degree is not worth as much as most institutions charge for it today; however, a decent job can’t be obtained in America without a bachelor's degree. So the new paradigm that students live in requires a bachelor's degree for under $30,000 in order to get a job. Regional institutions that can offer a bachelor's degree for under $30,000 in a convenient, online/ground, real world model will win big.
Smart analysts and private equity investors believe that the future of publicly traded public companies will parallel the healthcare industry, with average multiples at between 7x and 9x producing handsome dividends very consistently.
6. Model for Success — Our success helping with Grand Canyon University and the predecessor to Bridgepoint Education has been a simple risk/reward formula of entering the market with a turnaround platform with a minimum amount of cash with a seasoned team to create maximum returns in three to five years.
The estimated total amount of money invested in Grand Canyon University and Bridgepoint Education was approximately $60 Million, creating about $2.5 Billion in value (Case Studies). Both companies, while undervalued on Wall Street as part of a peer group, continue to generate terrific cash returns on initial capital. Frankly, they would do much better as private companies generating dividends for their financial sponsors. Note: While service companies, all of which are under growing risk of extinction by regulators, are all the rage with private equity investors today, I have followed Dr. Sperling’s advice that “He who signs the Degree has all the power”.
7. The International & Online Factors — Our telephone is now ringing consistently from incredibly fast-growing education companies outside of America. These companies are seeking all forms of joint ventures to international students in the form of dual degrees, 3+1 degrees, co-branding opportunities on niche programs like engineering and business, and a desire to acquire a reasonably accredited institution as part of a global education system.
In a recent meeting with Google executives, I began my presentation by stating that the post-secondary education market in the United States was approximately a $400 Billion market, with the current administration promising to increase spending at all levels for this market. The Google executives then calmly raised their hands, and told me, "Michael, it is not a $400 Billion market—it is a $3.2 Trillion market on a global basis—which we are interested in exploring."
Online education is only about 12 years old. The Internet disrupts every business it touches, and online education will become one of the next global businesses for U.S. institutions. Economists agree that any U.S. business that cannot export a product or service of high value to East Asia will have problems. Exporting U.S. online education makes sense.
Because there are only about 2,800 regionally accredited licenses in the United States, the franchise value on a global basis will continue to increase. Innovative operators of post-secondary regionally accredited institutions, working closely with forward thinking regulators, are just now beginning to look beyond their borders to add to the demand available in the U.S.
Readers of this self-serving but honest commentary who might have an interest in exploring investments in the post-secondary education marketplace, a better than average private equity return on investment, and the satisfaction of helping people live better lives through education should not hesitate to contact me, Michael K. Clifford at email@example.com.