Corporate, Domestic, For-Profit, Investors, Legislation, Opinion, Required, University & College - Written by on Tuesday, September 13, 2011 15:00 - 5 Comments

Industry View: “Is For-Profit Education Dead?” Guest Column by Michael K. Clifford

 

Note from WiredAcademic Editors: We welcome occasional thought pieces from participants in the industry. We also welcome your comments and discussion on this particular piece.

Is For-Profit Education Dead? 

By: Michael K. Clifford 

Some would say that the for-profit post secondary 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 attorney generals 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 they are a changing. Those regulating the US education sector recently 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 substantial 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 September 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. 

This week, 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 over $50,000 a year for tuition, room and board, they inevitably ask “How long can this go on?” Enter the disruptive new model: education 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 and good for the economy.

Most people are gravely underestimating the biggest game-changer: the Internet. The Internet has disrupted every business model it has touched. And it just began interfering with education about 10 years ago. As younger faculty age into leadership positions at all institutions, they understand life-in-the-cloud. Accreditors as well as all regulators have actually been much more proactive than they have been given credit to use technology to create a better overall student experience. I am seeing a rapid increase in accountable academic quality, much more nimble new degrees being offered to meet retooling of a skilled workforce, and dramatically more transparency in all metrics including financial. 

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 especially from the innovative new model of education entrepreneurs. 

The bottom line: 1) most institutions, nonprofit and for profit, receive close to 90% of their revenue from federal programs; 2) the good news is that higher education has always been a highly regulated sector; 3) regulations in many respects are good for incumbents or for business models that are able to comply with regs; and 4) the “new model” company can comply with the regs and generate sufficient return on invested capital.

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.

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

 

 

 

 

 

 

 

 

 

 



5 Comments

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Paul Glader
Sep 17, 2011 14:24

I agree with many of Michael’s points in this thoughtful piece. But I do take issue with his comparison of for-profit colleges v. traditional colleges. It’s not an Apples-to-Apples comparison. Degrees from for-profit colleges are not as well-regarded as most traditional universities. The For-Profits should take this as a challenge to improve quality as well as competing on price. It is wise to lower their prices in order to challenge and compete with community colleges and lowest-tier state colleges. But they might also think about creating a few premier for-profit institutions that have competitive admission criteria, well-paid faculty and blended models of on-campus and online learning. Otherwise, it seems they are too focused on profiting off a lower-cost model rather than truly exploiting the technology and cost advantage to create an impressive university. Such a Harvard of online learning would go a long way to being a standard-bearer for quality. It would impact other For-Profits as well as traditional colleges toward new approaches. Is it even possible, though, to create such a school using a for-profit model?

czander
Sep 19, 2011 11:45

Based on an analysis of the Presidents FY2011 budget, in FY2009 there were a total of $605.6 billion in federal education loans outstanding, comprised of $149.4 billion in the Direct Loan program and $456.2 billion in the FFEL program. The projected totals for FY2010 are $672.0 billion and for FY2011 are $745.5 billion. Each year more than $100 billion in federal education loans and $10 billion in private student loans are originated. At this rate the total student debt in America will approach a trillion dollars. In 2010 student loan debt exceeded total credit card debt. Consider this, if the projected default rate continues to grow by 2012 it could reach 56 percent for non-profit graduates and 70 to 90 percent of the for-profits. By the end of 2012 the amount of defaulted loans will be between $600 billion and $800 billion. Most of these defaulted loans are government backed, meaning the tax payers will pick up the tab. In 2010 gross public debt in America was $14 trillion, or over 95% of GDP. Over the next 10 years this public debt which includes student loans is expected to grow adding over $10 trillion to outstanding federal debt.
Read http://www.opednews.com/articles/Creative-Destruction-The-d-by-william-czander-110228-297.html

Bridgepoint investor predicts boom in for profit edu - Absolute Variety, LLC
Sep 19, 2011 22:59

[...] Michael Clifford, an early investor in Bridgepoint Education and Grand Canyon University gave his thoughts on the for profit EDU sector on the WiredAcademic site.  [...]

Wired Academic
Sep 20, 2011 0:26

Hey Krish, appreciate your post response. Glad you highlighted the point that there are definitely gems in the mix. Seems like there is wholesale dismissal of the sector on many levels by investors. Let’s not throw the baby out with the bath water. Your point about the political climate and the unions is a big one too. This is an opportunity to innovate School 2.0 and re-balance the power dynamic.

Wired Academic
Sep 20, 2011 0:45

Hi William, the numbers are totally staggering. We agree that the rate at which the U.S. is accruing debt is a cliff we already teeter on. There is momentum building that we hope will disrupt the inertia and pioneer truly powerful new learning paradigms. Already, there are new ideas like open source badges that can offer the possibility of accrediting non-brick-and-mortar education/certification.

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