Private Equity, investment and consolidation in Vocational Education
April 12, 2018 5 Comments
A couple of days ago now the AFR posted an article about private equity and the Australian for profit education market, including Vocational education, in which they suggested ‘The Australian education sector is set to be the subject of a wave of consolidation led by private-equity looking to tap into its high-margins and predictable cashflow. Global strategic-advice company, EY-Parthenon, is gearing up to target the $25 billion for-profit education industry.’ The trouble is that I can’t help but think I have heard this all before.
During the middle and running through to the what was clearly inevitable end of now infamous VET Fee Help era, private equity firms, based on amazing high EBITDA margins, the lure of cashflow backed by government contracts, and an almost complete and utter misunderstanding of the VET industry in Australia, rush into the market and snatched up, partnered with or poured money into some of the biggest players in the educational market at the time all of which failed to produce the results which were way overhyped by ambitious CEOs, Managing Directors and founders looking to provide cashflow for expansion in a market which everyone, except it appears, the so call professional private equity gurus knew was a bubble soon to burst.
Now less than two years since the bubble well and truly started to burst and the demise of the vast majority of private equity backed providers, we see yet again a private equity strategy company selling the idea of investment in the Australian education business. Admittedly EY-Parthenon and their Varun Jain and not limiting themselves to the VET market this time with their eyes on a more broad vista including early education, schools, VET and Universities. The problem for me is in statements such as such as the one where Mr Jain suggests that the fact that funding comes largely from the public sector, student fees and philanthropy is not something that he is concerned about, shows a think a deep misunderstanding of the volatility of the publicly post secondary education market in this country. Post secondary education and particularly vocational education in this country has always been very much at the whim of the political winds and lean of whoever is currently in government. I mean money always flows towards TAFE which of course could have more to do with gravity or perhaps more correctly inertia than anything else. Then of course the spray which escapes from the main trickle is what is left for the non-public sector and exactly how much of a spray that is depends on some many thing that are out of the control of the operators of non-public RTOs.
So some of you are probably thinking now, why is he banging on about this. It is simply because I am a little worried by this talking up of private equity again. Not because I think that all education should be publicly delivered, the educational market should be as diverse as possible to allow for innovation and choice. Nor do I care about private equity firms losing millions of dollars when the businesses they have invested in (without proper consideration most of the time in my opinion) fail. Although I do care deeply about the effect that this has on both students and our sector workforce. The concept of industry consolidation doesn’t present an issue for me either, as I do think the entire sector, public, private and not for profit, could do with a shake up and consolidation.
What worries me is that we have seen this before and we have seen the effects of it. We have seen investors with little or no understanding of the education market in Australia and even less understanding of how to run an educational business, take substantial stakes in providers and because of their lack of knowledge and understanding drive their investment vehicles into practices and operations where their ability to deliver quality training and meet compliance needs are stretched to breaking point and beyond. Roll ups, complex corporate structures, a focus on warm bodies rather than quality, all the things that force governments to enact changes to funding programs and harms the public’s view of the industry as a whole.
If you are a private equity firm (like EY-Parthenon ) please for a start do some real research, talk to people who are actually involved in the industry not just the usual crop of pundits, lobbyists, ex politicians looking a board seat and the like, because I can tell you that they knew like the rest of us about the issues around Vet Fee Help and market in general when the last crop of equity firms rushed in, they just didn’t bother to say anything. Secondly if you are going to invest, again put people on your boards and in senior management roles who understand the market in this country and really understand the issues around training and assessment in our regulatory environment. If you don’t then you are throwing good money after bad and damaging the industry in way you could not possibly understand.