Private Equity, investment and consolidation in Vocational Education

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.

 

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VSL – The first six months, well sort of.

As many of you are aware the report on the first 6 months of the Vet Student Loans (VSL) Scheme, which replaced VFH at the beginning of the year has been released.  Now while it is not too long (a mere 31 pages, plus a spreadsheet of data), it does make for some interesting reading.  It is important to note that this report is on the six month transition period between VFH and VSL and some of the data is for providers, who while part of the transitional program did not have their approval to deliver VSL courses renewed under the full scheme.  There were 167 under the provisional arrangements but only approximately 125 have continued into the full scheme.  The other significant thing to remember about some of the details in this report is that there are caps of 5,10 or $15,000 associated with the vast majority of courses listed, with Aviation courses having a much higher cap than others.

Through transition there were 167 providers, 35 were TAFEs and other public institutions and 132 were private providers, and interestingly of that 167 only 138 enrolled students who accessed VSL funding.  A total of 24,492 students had VSL approved for a total of $78,131,044.  This represents an average across all enrolments of just over $3000 per student.  One might say on these figures alone, if this program has achieved nothing else it looks as if it has achieved the government’s goal of reducing the student debt.  It seems clear that the days of unbridled greed both in terms of enrolments and the fees being charged are well and truly over.

What is a little bit more interesting is that public providers seem to be the clear winner in the VSL funding stakes, with TAFE QLD pulling in the most funding at a shade over $13 million, and TAFE NSW coming in second with only about $8 million.  In fact all but one of the top ten spots in the VSL league ladder are held by TAFEs or public institutions with BasAir aviation college in tenth place. The truly interesting thing for me in all of this is the change in the league tables for most popular courses, with the perennial winner, the diploma of business dropping back to sixth, and the fourth placed, under VSL, Diploma of Leadership and management sliding way down the pack to a dismal twenty-first.  The upward mover is screen and media now coming in at fourth having previously been pretty much unranked, with Nursing and Community services still holding onto their VSL popularity.  What does this mean, well, what it could mean is that without the unfettered fees of VFH, slinging brokers (which you can’t really use now anyway) in excess of $5,000 to grab students off the street so you could enroll them in an $18,000 Diploma of leadership and management is no longer a sustainable business model, and perhaps when these students aren’t being pressured into signing up over the phone, at their front door or as they exit centrelink it turns out that most people don’t actually want to do the course and perhaps only did it so they could get that Ipad that was on offer.  Oh sorry I must have slipped my cynical hat on there for a moment without noticing.

If I am being really honest this report doesn’t actually tell us very much at except that VSL has done what it had been expected to do which is to curb the out of control spending which had occurred under VFH, and reign in some of the abhorrent business practices which had grown up around the program as well.  It is far to early to tell whether the design is right, I get the feeling it is at a high level but needs some adjusting where the rubber hits the road, and whether new issues will pop up as the program marches forward.  Is it perfect, no.  Is it better than the utter disaster we had previously, at least in my opinion yes.

Anyway that’s just my opinion.

Careers Australia in Voluntary Administration – Some comments

So just in case you haven’t heard the news today, Careers Australia was put into voluntary administration yesterday with PPB Advisory moving in as the administrators.  So as of yesterday there are 1000 staff who have been stood down and around 15,000 students who will have to organised into new courses through TDA who were Assurance Scheme for Careers.  I am going to be really blunt here.  I for one am not surprised that this has happened.  I said in a post earlier in the year when there was a range of closures of colleges which had grown large on a diet of VET Fee HELP, that as we approached the end of this financial year that we would see either the substantial contraction or closure of some of the big players.

Why has this happened?  The answer is actually very simple, as I talked about in the post mentioned above, heavy reliance on a single source of funding which can at any point be changed or removed is a recipe for disaster.  Careers Australia appear to have blamed the Federal Government and its policies around the sector, in particular the new VET student loans scheme and the governments decision not to allow Careers access to this scheme for their move into liquidation.

I have to say that I think if this is a true reflection of the rhetoric coming from Careers, then I think it is definitely stretching things a little.  Certainly it is the case that the cause of this collapse can probably be  linked to the decision by the government to change the way income contingent loans work and to deny Careers access to the new system.  However can we say that the Federal government is to blame, I think not.  In fact I actually struggling to find a scenario, except for the old, we are too big to fail, the government will have to bail us out mentality, that could have provided Careers and its management with the idea that they were ever going to be given full access to the new scheme.   I cannot see how someone within their management didn’t suggest that given the issues with the ACCC, a range of other issues, media coverage and general public sentiment, that there might be pretty good chance that the government, with its very strong position to clean up the sector, might, whether any of the issues raised about Careers were true or not, be reticent to give them access to the new scheme.  To be honest and to put in the word of Sir Humphrey Appleby, it would have been a brave and courageous decision by the minister and the department to allow them access to the scheme.

This should not be taken to suggest that I know anything about the inner workings of Careers or as to whether or not any of the allegations against them were true, or whether issues, if there were any, had not all been rectified.  It is just to say that simply from a point of view of being seen to be taking action and moving forward with the new scheme that, giving access to a provider which had been the subject of so much negative media scrutiny over the last 2 years would have undermined public perception of the scheme.  And the management of CA should have not only know that but have been prepared for it as well.  Even if they had been granted access to the new scheme this would have still seen their overall income drop by as much as two thirds, which would have had I suspect an equally devastating effect on them.  I am amazed that the management of CA appears not to have been working towards a solution or a way forward that didn’t include the VSL scheme, or maybe they did and we are seeing that in action now.  But again this is all simple speculation on my part and should not be taken to suggest anything about the mindset or plans and ideas of CA management.

It is yet another example of what happens when providers are far to heavily invested in one source of income, particularly where that source of funding is something that is controlled by the government.  Where your ability to be able to deliver the services you provide is entirely contingent on a single source of income and there are no plans or contingencies in place to react to changes in that income source there is always going to be a significant risk to continued financial sustainability.

I feel for the students and staff who have had their lives interrupted by this, however for a lot of us something like this happening has never been to far over the horizon.

Anyway that’s just my opinion.

 

Some VET Fact and Myths

Rod Camm wrote a really interesting piece for his ACPET National Monday Update this week, which really struck a chord with me, primarily because it is looking at the VET sector and trying to inject some facts into a discussion often held ransom to media outbursts and ideological positioning.  I thought therefore today I might look at the facts that Rod outlined and perhaps some others to see if we can’t get a little less biased view of our sector.

The first, and I think one of the most important facts pointed out, is that there is only about 2500 providers in the VET sector, actively delivering training, not the 4-5000 which is an often quoted number and the enrolments with these providers range from 1 student to over 100,000 students.  A lot has been made of high-flying corporate whiz kids, cashing in on the VET sector and making massive profits at the expense of everyone else The media, the various education unions and some politicians have had a field day promoting this view, often for their own ends.  The truth is however that private providers have average student enrolments of 819 with the median number being much lower at 204.  This is tiny in comparison to the 19,000 and 16,000 figures for TAFE.  The overwhelming majority of private providers are not huge corporate monsters, whose only goal is to make as much profit as they possible can; with just under 1000 private providers have less that 100 students, the vast majority are simply small providers, providing awesome outcomes to their students and the industries they serve.  I bet we will never see that little nugget from the news media or the deep left, who much prefer the sensationalism of corporate failures.  As I said in my piece early last year non-public providers are an incredibly diverse lot.

There is another myth that has been perpetrated upon this sector or more specifically upon the non-public side of the sector and that is that business and industry trusts and is more satisfied with the public provision of training than with the private sector.  You could wonder I  think, when you read the news media and the various commentaries and interviews around it as to why there was even a a need for a non-public VET sector given the love which is espoused for the public providers.  When we look at the data from NCVER however, we see a different picture; employers indicate 80.0% satisfaction with private providers, 83.6% with industry and professional associations and 66.1% with TAFE. 80% of employers are very satisfied with the training delivered by non-public providers.

Now please don’t think I am trying to badmouth or undermine TAFE here, I have always been, and will continue to be a strong supporter of a well-funded and healthy public provider system.  The public providers have a  tough job, constrained in ways the non-public side isn’t, funding, bureaucracy, student cohorts, and the needs and wants of governments, it is no wonder their satisfaction figures are lower. This doesn’t mean that they do not do as good a job as or produce outcomes equal to that of the non-public providers, it is just that when you are trying to keep so many, often competing stakeholders happy, you are never going to succeed in doing that.

On to some other stuff now, well some facts and figures, which Rod doesn’t mention, but which I think are worth commenting on, primarily costs, funding and VFH.  Now I have covered all of these points in other articles before, however I think that they are all worth mentioning again in this context.  The first is of course the issue of funding for TAFE, much has been made of the fact that TAFE needs to be better funded and interestingly in 2016 we saw a lot of people talking about the need for TAFE to receive at least 70% of the funding available for VET  This of course stopped quite quickly when it was pointed out that the public providers received around 80% of the public funding available in the sector already.  Now before you ask where this figure comes from, it comes from the actual budget papers of all of the state governments, who are the ones responsible for the funding of the TAFE sector.  The bigger question, which I asked last year and never got an answer for is where did that figure come from in the first place?

The other point is this idea that training delivered through a private providers is far more expensive that training delivered through the public provider, in one case it was claimed by The Greens, that private provision cost as much as 7 times the cost of public provision.  These claims are demonstrably incorrect as I explained in detail here.  These sorts of claims are based in general of really poor interpretation of information by people who have little or no knowledge of the sector itself.  They ignore facts such as, that under most of the entitlement funding models the subsidy if the same for all providers, so the amount of money being paid is the same no matter who delivers the training.  Even when we roll VET fee Help figures into the whole mixture of other funding and models that are out there, we see that at the very outside non-public provision across all courses at all levels the cost of delivery of a qualification through a non-public providers is about the same as it is through a public provider with both, when it all comes out in the wash costing around $45,000 per enrollment.  It is important to remember however that is figure is going to dropped substantially with the introduction of the VSL scheme in its entirety from June this year.  It will be interesting to see what happens to these figures and comparisons, when we get to look at them again at the end of the next financial year.

So why bring all of this up and talk through it?  As Rod suggested it is important that we know the industry that we are working in.  It is important that we know not just how to do the jobs that we do but the facts and figures which underpin that.  Why? Because if we don’t then we might be tempted to believe some of the  ill-informed, ideology fueled nonsense that comes to us through and is promoted by the media and other sources.  Whether it is delivered by a TAFE, and industry association, a not for profit, an enterprise RTO or a private company, Vocational education is important to this countries future and decisions about it and how we can make it better need to be based on fact not opinion.

Anyway that’s just my opinion.

 

Rebuilding VET

So  a number of people over the past few weeks have asked me about my opinions about how we can rebuild and revitalise VET in Australia.  While I have in the past spoken about what I thought might be specific changes to particular parts of the system, I have to at least some extent shied away from proclaiming my view for a future of VET.  One of the reasons for this is that, to me, a lot of what happens in this sector, a lot of what the sector does and the vast majority of the outcomes which are produced are excellent.  I am not sure that the sector needs a reimagining or wholesale reenginerring of how it operates.

If you listen to the left you will hear the constant chant of TAFE TAFE TAFE, get rid of private providers and the system will be right.  If you listen to the right, it is all about market forces, competitiveness, and the free market and here of course is the rub, they are both right and they are both wrong.  The answer lies somewhere in between.

We need a strong public provider and a strong network of private providers to make the system work effectively, more importantly though we need both groups to be treated the same and regulated the same, and not just in name only, in actual practice.

We need to recognise that trainers and assessors in this industry need to have three skill sets.  They need to have a deep understanding and relevant, up to date knowledge of their industry; they need vocational currency.  They need to have and understanding of the VET sector; how assessment processes work and what it means for someone to be competent, and they need to be good at presenting the material they are covering in an engaging and meaningful way, so that students actually learn what they need to.

We need the owners and senior managers of of all providers, be they public or private to really actually put students and their outcomes first.  Yes sustainability is vitally important, but we are in the business of education, so the actual education should be our focus, not how much money we can make, or whether or not we have the best office or the best view, or what awards we get.  The outcomes for students should be at the heart of what we do and if it isn’t we should probably get out and find another sector.

We need the regulator to actually regulate.  More than that however, we need to regulator to act fairly, consistently and in timely manner.  It is essential that providers regardless of whether they are public or private, new entrants or longtime RTOs, catering to 100 students of 10,000 students that they will be treated and assessed fairly and consistently and that breeches dealt with appropriately.

We need to government to invest in the VET system and to invest in it properly.  There is a need for sensible long term commitments to funding plans, be they direct entitlement style funding, organisational funding or contingent loan facilities.  The commitment however has to be long term and it has to address the skills and knowledge needs of this country moving forward.

Sounds really simple doesn’t it.

 

What is the purpose of a VET qualification?

Over the last few weeks, the concept of mission statements for, and the purpose of, Vocational Education (VET) has been rolling around in my head, so this week I thought I might throw an idea or two about the purpose of VET in particular out to the world and see what happens.  Firstly then here is what I think is a relatively simple statement about what VET is designed to do;

Vocational Education and Training (VET) is designed to deliver workplace specific skills and knowledge, across a wide range of careers and industries which prepare participants for work, advancement or further study.

but let’s just leave that there sitting in your brains while I go on a little bit of wander through some of my thoughts on this idea of purpose in VET.

The first question which comes into my mind when I think about any kind of education, but particularly education over and above compulsory, Primary and Secondary education is why? Why would someone make the decision that they wished to undertake some program of study in some chosen field?  While we talk about lifelong learning, and learning for the sake of enjoyment and personal interest and I am sure that for a significant number of people the continuing learning process is something which motivates them and to at least some extent underpins some of their decisions in relation to learning, I don’t think it is for most people the central thing which drives them to undertake formal courses, particularly formal courses in the VET sector.

Most people, according to the NCVER just over 80%, undertake VET for employment related reasons.  This would seem to suggest that for the most part people who undertake a VET course are looking to convert the outcomes of that course (skills and a certificate) into either employment or advancement in their role or field.  This idea of converting a VET qualification into employment is an important one because I think it is one that in general all stakeholders can agree upon in terms of a purpose.

For employers and industry the idea of being able to convert a person to a worker or a more highly skilled worker through a qualification is central to why employers would utilise the VET system. Employers need workers with the right skills and qualifications to undertake the roles they have within their organisations.  From a Government perspective, if we focus on workforce participation, converting people into workers through a qualification reduces unemployment numbers, (even when they are undertaking training) and creates a pool of skilled workers for employers and industry to call upon when needed.  For providers having a good qualification to employment conversion rate helps to make the business more profitable and sustainable through growth in their reputation as a quality provider.

So it seems to me that this idea of conversion, converting a qualification into employment or advancement is an important one across the board and one which we could perhaps use to underpin our various models and thinking.  If the central goal of the delivery of a VET qualification is employment or increased chances of employment and advancement, this creates an environment where the outcomes for the student are central and quite clear.  This should then provide us with a critical lens through which to assess compliance and quality in terms of providers, connection with industry, funding levels and appropriate courses and range of other parts of the puzzle.  It also would provide students with a lens through which to evaluate both the courses they are interested in undertaking and the providers through which they wish to undertake them.

 

Anyway that’s just what I think.

Voluntary Administration, closures and VSL – A New Year in VET

As many of you may be aware a number of RTOs have over the last few weeks have shut their doors either voluntarily or not so voluntarily.  A significant proportion of these providers were ones which had large exposures to the VET fee Help market and have been financially impacted quite severely by the move to the new VET student loans scheme.  Have we seen the last of these closures?  I certainly don’t think we have. Over the rest of this financial year we will see the closure or downsizing of a significant number of VFH providers who, for what ever reason have been unable to adapt to the new market place.

Why is this happening?  There are a number of quite obvious reasons why this is occurring, although it is important to note that I have know direct knowledge of the the reasons behind any or all of the recent spate of closures.  The first reason I would point to however,  is a simple one, either the provider has not been granted access to the new VSL system for whatever reason, or the courses which they relied on have been removed from the list.  In both these cases the revenue which was being generated through VFH will have effectively stopped.  Take for example a provider with $11 million turnover, $10 million of which came from VFH.  Not being given access to VSL or having their courses removed from the list effectively reduces them to a $1 million turnover business and destroys the cash flow created through the VFH system.  Finding a way to plug this revenue hole will be almost impossible given the changes under VSL, because even if the provider were to be granted VSL access in the next round or commence delivery of courses which are now on the approved list there are other issues which I will outline below.

The second reason why a number of VFH providers are struggling is the loan cap.  As we know the government has capped loan amounts depending on the course you are undertaking, at $5,000, $10,000 and $15,000.  Let’s take our $11 million provider again.  Say they were delivering the Diploma of Leadership and Management under VFH for $15,000 and this accounted for all of their $10 million VFH income (I know this is unlikely but it is just an example).  The price of the the Diploma is now capped by the government at $5000, so even if the provider is granted early access to VSL and can still generate the same number of enrollments, without the use of third party brokers (which now can’t be used under the legislation) their income from ‘Loans’ under VSL will be at most 1/3 of what it was under VFH, reducing their income to $3 million making it exceedingly difficult to continue operating the same manner they had been.  The other thing to consider here is that even if the provider can generate the same number of enrollments, payments under VSL are now made on a completion rather than commencement basis.  This means that providers now have to have enough additional cash flow generated from other sources to sustain delivery and assessment to these students for perhaps as long as six months before they complete and payments flow through.  Even if therefore a provider was granted access to VSL and could generate the same level of enrollments, they will not, in most circumstances be able to maintain their cash flow at the same level which will of course mean they will either need to severely downsize or close.

The changes from VFH to VSL give us substantial evidence as to why providers should ensure that their revenue streams are as diversified as possible if they want to be able to sustain changes in government policy, funding and the market in general.  Heavy reliance on one source of funding, as myself and others have said for a long time now, is a recipe for disaster.  So will we see more of these closures?  I certainly expect that we will, in particular I think we will as the end of this financial approaches and the legacy arrangements around VFH (and the payments associated with those arrangements) cease and revenue streams become tighter.  I suspect that June/July will be the prime time this year for the closure of a number of RTOs

Anyway that’s just my opinion.

Happy New Year.

 

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