Why Europe should not be scared of private investors in higher education?

Posted on 18/10/2011


A recent information surfaced that private equity firms are looking to acquire universities (in UK) (http://bit.ly/pAEJly). This was followed last week by an article in the T.H.E. (http://www.timeshighereducation.co.uk/story.asp?sectioncode=26&storycode=417767&c=1). I think that this information should not seen as a threat as the past experiences have shown that such investment is most of the time far from being interesting from private providers.

If we don’t have examples of private equity firms investing in significant operations in higher education in Europe, we have examples of private providers (mostly from the US) who bought over or took a share in private providers in Europe.

For example, C.E.C bought one business school in France and one in Monaco, Laureate has one engineering school in France, several business schools in the rest of Europe and runs the online operations for the University of Liverpool from its Amsterdam office.

Even if we will never get a clear answer from these private providers, we can genuinely guess that they are expecting at least 15% in operating incomes. Some of the financials available for C.E.C. for example show that this is more or less what they get on their European operations.

Then, the issue is that most of the universities, business schools or engineering schools in Europe are either public, or if private, not-for-profit. Purely for-profit providers of a reasonable (= interesting for the investors) size are very rare. They were mostly built 20 to 30 years ago by entrepreneurs who managed to make a decent living out of them. And most of these private ones, up to our knowledge, have already been bought by one of the large US players mentioned above. So, it means that the potential number of targets is very small.

Then, when we look at the not-for-profit private providers, they mostly follow a business model similar to the ones of public universities: the spending is adjusted to the expected amount of revenues. It means that they are very far from the expected 15% and are more between 0 and 6-7%. So they are not interesting enough for investors. We could of course argue that investors could try to cut costs, rationalise the activities,…to reach the 15%. But as these potential targets are facing a very fierce competition to attract the best students (keep their rankings, reputation and accreditation), they generally tend to use all the resources available to retain top faculty, fund research, spend on marketing,… So any significant gain could have important consequences on the revenues on the long term (Killing the goose that lays the golden egg).

It is not surprising in fact that, so far, the large US private providers have mostly invested in second or third-tier institutions with little or no international reputation. These institutions are not attracting the best students, but the ones who anyway want a degree, so are not sensitive to the same criteria as the better students. Thus, these schools or universities can invest less on research, on facilities, use more part-time faculty,…which allow them to maintain a better financial profile.

Of course, we may see in the future a European private institution bought over and successfully revamped (= becoming highly ranked and very profitable), but the current market conditions are not advocating for that in my opinion.