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THE PARTHENON GROUPBoston • London • Mumbai • San Francisco
Where are opportunities and how
can you capture them?
Investing in Education
Robert Lytle
Summer 2009
THE PARTHENON GROUP
2
0%
20%
40%
60%
80%
100%
Estimated For-ProfitEducation Revenues
K-12
Pre-K
Corporate Trainingand Other
HigherEducation
$96B
Pe
rce
nt
of
To
tal O
nlin
e E
nro
llme
nt
Where can financial investors play?
The United States is the single largest education market
in the world with a for-profit sector roughly $100B in size
● The U.S. spends ~40% more per K-12 student on
average than other industrialized nations; the gap is
even larger for post secondary spending
● Our enormous public K-12 system presents vast
opportunities
− ~50MM students in the public system
− ~ 6.2MM in private schools
− Only a small fraction on-line
− ~14,200 public school districts containing 97K
public schools (including 4K charter schools)
● We have a post secondary system second to none —
perhaps one of the U.S.’s next great ‘exports’
− Over 18MM students are attending 2- and 4-
year colleges and universities
− Over 4,200 degree-granting institutions
THE PARTHENON GROUP
3
● Many big, high profile deals every year…
Many of you are moving to make
education an explicit investment focus
● Activity that continued even in the trough of the deal
market….
● Expectations of many to come over the next 12-18
months….
● And fertile ground for proprietary opportunities0
20
40
60
80
100
2005
64
2006
87
2007
62
2008
45
2009YTD
9
Pre-K
K-12
Higher Education
Corporate Training and Other
Education Sector Investment Activity
Source: BMO Education Market Equity Report September 2008; Stifel Nicolas Post Secondary Education FactBook; Capital IQ Education Industry, pulled July 2009
THE PARTHENON GROUP
4
0%
20%
40%
60%
80%
100%
Pre-K
Work-site
Standalone
$13B
K-12
Education Software
Gaming
Testing and Assessment
Schools
Outsourced SchoolManagement
Student Support Services
Professional Development
Publishing
$23B
Higher Education
Technology
Textbook Publishers
Institutional Services
College Bookstores
For-profit Universities and Colleges
$45B
Corporate Training and Other
Reference
CorporateTraining
$15B
PercentofTotalIndustryRevenue
ESL Testing and Assessment
Total = $96.3B
Parthenon sees significant investment opportunities
across this vast education landscape
Deals are everywhere, but require different approaches
and the understanding of radically different business models
U.S. Estimated For-profit Education Revenues
THE PARTHENON GROUP
5
● What is your target
transaction size?
● What business models are
most comfortable to you?
● Will you do non-traditional
structures (e.g., non-profit
conversions, JV / NewCo
structures, minority
interests)?
Where are
the deals?
Can this growth
continue and is it really
counter-cyclical?
What impact should I
expect from regulatory
changes and stimulus
money?
How can I ever justify
these multiples?
● What sector are we talking
about?
● Over what duration? (Note:
many different penetration
curves exist in the
education space)
● When you say growth, do
you mean market growth or
the opportunity for share
gain?
● Are you interested in
primary impacts (e.g.,
stimulus money available to
your target, effects of
announced regulatory
changes)?
-or-
● Secondary and tertiary
effects that are more
political, directional, and
speculative in nature?
● Do you know the sector
dynamics and the business
model really, really well?
● Do you have a strong post
acquisition play book?
● How well can you
supplement the
management team post
acquisition and what is your
experience as an activist
owner?
In the last year, Parthenon met with ~100 investment
firms around the world to talk about education investing
– You all ask us variations of the same questions
You Ask Us …
And We Ask You …
THE PARTHENON GROUP
6
0%
20%
40%
60%
80%
100%
Pre-K
Books and Toys
Child Care
36
K-12
Training and Professional Development
Student Support Services
Schools
Publishing
108
Higher Education
Technology
Publishing
University and Colleges
Vocational
90
Corporate Trainingand Other
ProfessionalTraining and
Reference
Corp
ora
te T
rain
ing
23
Num
ber
of
Deals
Total
= 257
U.S. Education Market Investment Activity
Source: BMO Education Market Equity Report September 2008; Stifel Nicolas Post Secondary Education FactBook; Capital IQ Education Industry, pulled September 2008
Where are the Deals?
Over the past four years, over 250 transactions
have occurred in the U.S. education market
THE PARTHENON GROUP
7
$0B
$20B
$40B
$60B
2000
$6B
2001
$7B
2002
$8B
2003
2004
2005
2006
2007
$24B
2008
$28B
2009E
$31B
2010E
$36B
2011E
$39B
2012E
$43B
2013E
$46B
2014E
$49B
2015E
$52B
Revenue($B)
$10B
$13B
$17B
$20B
18% CAGR 12% CAGR 9% CAGR CAGR
(‘00-’15)
16%
7% CAGR
-2%
0%
2%
4%
6%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Ye
ar-
on
-Ye
ar
Gro
wth
Ra
tes
High, but slowing growth… Coupled with clear counter-cyclicality…
-10%
-5%
0%
5%
10%
15%
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
OperatingSurplusAs%OfReceipts
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
TotalMarketSize
Cyclicality is tied to state budget surplus… But masked by a byzantine adoption sales cycle…
Post
Secondary
Enrollments
Basal
Textbook
Sales
Can this growth continue and is it really
counter-cyclical?
In education, many interactive forces cloud trends, making it
difficult to answer growth and cyclicality questions accurately
THE PARTHENON GROUP
8
0%
20%
40%
60%
80%
100%
Healthcare
Illinois School of Health Careers
Prairie State College
Waubonsee Community College
South Suburban College
Corinthian
City Colleges of Chicago
College of DuPage
College of Lake County
Elgin Community College
Other Universities
Robert Morris College
Harper College
Lincoln
Oakton Community College
10,519
OtherVocational
Studies
Prairie State CollegeSouth Suburban College
Elgin Community College
City
Co
lleges
ofC
hic
ago
Lincoln
Oakton Community College
OtherUniversities
College of DuPage
Waubonsee Community College
4,095
Mechanic
s
College ofDuPage
Harper College
Lincoln
UT
IofIllin
ois
Inc
College of LakeCounty
Elgin CommunityCollege
Oakton Community College
OtherUniversities
Waubonsee Community College
City Colleges ofChicago
Prairie State College
3,0
52
Culin
ary
and
Pers
onal
Serv
ices
Capri GarfieldRidge School ofBeauty Culture
City Collegesof Chicago
Piv
otP
oin
tB
eauty
Scho
ol
CannellaSchool of
Hair Design
College of Lake County
Oth
er
Univ
ers
itie
s
Elgin Community College
2,2
19
Busin
ess
CityColleges of
Chicago
College ofDuPage
College ofLake County
Ro
bert
Mo
rris
Colle
ge
WaubonseeCommunity
College
HarperCollege
South SuburbanCollege
Elgin Community College
OtherUniversities
Oakton CommunityCollege
BIR Training Center
Zarem Golde ORTTechnical Institute
1,9
71
Socia
lS
cie
nces
Elgin CommunityCollege
South SuburbanCollege
OaktonCommunity
College
City
Co
lleg
es
of
Ch
ica
go
HarperCollege
National-LouisUniversity
OtherUniversities
Prairie State College
College of DuPage
1,7
05
Oth
er
Dis
cip
lines
City Collegesof Chicago
National-LouisUniversity
College ofLake County
The Illinois Center forBroadcasting
Zarem GoldeORT
TechnicalInstitute
Robert MorrisCollege
College ofDuPage
BIR TrainingCenter
The John Marshall LawSchool
Waubonsee Community College
Oth
er
Un
ivers
itie
s
Harper College
Oakton CommunityCollege
South Suburban College
Elgin Community College
2,6
06
Pe
rce
nt of
To
tal C
om
ple
tio
ns
Total =26,167
Greater Chicago Area Certificate Degrees, 2007
0%
20%
40%
60%
80%
100%
WASHINGTONDC
1,432
RICHMONDVA
1,421
NORFOLKVIRGINIABEACH
704
RO
AN
OK
E
542
OT
HE
R
596
Total =4,695
Private Special Education Placement, Virginia
Can this growth continue and is it really
counter-cyclical?
Do not forget the ability to gain
share quickly in highly fragmented markets
For Profit
THE PARTHENON GROUP
9
$0B
$10B
$20B
$30B
$40B
$50B
March 2009
IDEA
StateStabilization
Title I
$43.2B
July 2009 -September 2009
IDEA
StateStabilization
Title I
$26.9B
October 2009 -Spring 2010
Other
$9.2B
FederalStimulusFunds
Source: U.S. Department of Education, updated 2/19/09
Timing of Stimulus Package Education Funds Other Category, October 2009 – Spring 2010
● Title I School Improvement Grants ($3B)
● Education Technology State Grants ($650MM)
● Some sources of funding will be awarded
competitively:
− State Incentive Grants ($4.35B) and
Local Innovation Grants ($650M)
− Teacher Incentive Fund ($200M) and
Teacher Quality Enhancement ($100M)
funding
− Statewide Data System funding
($250M)
What impact should I expect from regulatory changes
and stimulus money?
Example – Understanding the K-12 Stimulus Impact
Weekly or monthly, there is a regulatory or funding ‘event’ in education –
staying on top of them and interpreting their impact is a real task
THE PARTHENON GROUP
10Source: U.S. Department of Education, updated 2/19/09
$0B
$100B
$200B
$300B
$400B
$500B
$600B
1970-7
1
1975-7
6
1980-8
1
1985-8
6
1990-9
1
1995-9
6
2000-0
1
2005-0
6
To
tal F
un
din
g (
$B
) Local
State
Federal 7%
8%
7%
('70-'05)
CAGR
10%
4%
6%
('00-'05)
CAGR
$0B
$20B
$40B
$60B
$80B
$100B
Incremental FY2009 andFY2010 Stimulus Funds
October 2009
- Spring 2010
July -
September
2009
March 2009
$79B
Federaleducationspending
7% 5%
K-12 Funding Sources, 1970-2006 Stimulus Spending
7% 6%
8% 4%
7% 10%
CAGR
(‘70-’05)
CAGR
(‘00-’05)
What impact should I expect from regulatory changes
and stimulus money?
Example – Understanding the K-12 Stimulus Impact
Understanding long term political effects is even more critical;
what impact does a doubling of federal monies imply?
THE PARTHENON GROUP
11
0%
20%
40%
60%
0.1 0.2 0.5 1 2 5 10
RevenueRevenue
Relative Market Share (Degrees Awarded)
Estim
ate
d E
BIT
Ma
rgin
(3 y
r A
ve
rage
)
For Profit Education: Online and Ground Program Locally Weighted
Relative Market Share vs. Profitability (3-Year Average Ending 2007*)
10,000 - 20,000
20,001 - 30,000
30,001 - 40,000
>40,001
<10,000
How can I ever justify these multiples?
Scale matters in every one of these businesses – how we
measure it and the degree of impact may differ, but it always matters
Online Students
*Market defined by degree type and discipline; Markets include public, non-profit, and market funded institutions; Public company financial data from 10K’s; private company data from NECS reporting
THE PARTHENON GROUP
12
0%
20%
40%
60%
0.1 0.2 0.5 1 2 5 10
RevenueRevenue
Relative Market Share (Degrees Awarded)
Estim
ate
d E
BIT
Ma
rgin
(3 y
r A
ve
rage
) Building Scale
Driving share gains, likely through
acquisition, generates predictable
margin gains
Operational Improvements
Operational improvements are
required to achieve expected levels
of profitability given scale
How can I ever justify these multiples?
Optimizing the current business and building scale
are critical in every education business that we have seen
THE PARTHENON GROUP
13
Fight the slowing market
growth by supporting and
filling the core…
…Focus on operational
profitability by driving
incremental utilization…
…Build out scale positions
and consolidate…
● The market is large and will
continue to grow at a strong
pace; but, that pace is
decelerating
● All students are not equal; some
are more profitable than others
● The current marketplace is too
fragmented for long-term
success and there is significant
opportunity for further
consolidation
● Marketing Effectiveness
● Student Experience
● Pricing
● Retention
● Utilization
● In-Fill Territories
● Phase II Consolidation
…Expand from core
strength into nearby
adjacencies
● Core areas of strength can be
leveraged profitably into close
adjacencies of delivery method
and degree types
● New Degrees (Associate,
Master)
● New Verticals
● Online Expansion
Optimize Core Programs
A Classic Post Secondary ‘Play Book’
How can I ever justify these multiples?
You will need a clear post acquisition plan and, in education, you will
typically need to supplement the current team and be an activist investor
Expand Into Adjacencies and Build Scale
THE PARTHENON GROUP
14
● Deals are everywhere.
However, be very aware
that each sector
represents fundamentally
different core business
models and value drivers
(e.g., distributed retail,
direct marketing, sales
force management)
Where are
the deals?
Can this growth
continue and is it really
counter-cyclical?
What impact should I
expect from regulatory
changes and stimulus
money?
How can I ever justify
these multiples?
● Different sectors have
different dynamics, most of
which are not straightforward
● Be prepared for weekly or
monthly ‘events,’ yet retain
the long-term perspective
that ‘this has happened
before and we kept on
growing’
● Historically, leverage…
● In most instances you are
buying long-term growth
with low volatility – be very
sure about the sector, the
business model, your target
company’s position, and
your post acquisition plans
There are always issues to resolve, but
education represents one of the most compelling
sectors for investment
You Ask Us …
Our Perspective…
THE PARTHENON GROUP
15
0K
10K
20K
30K
40K
2004
2.0K
2008
PurelyOnline
10.5K
Enrollment
50.9%
('04-'08)
CAGR
0K
10K
20K
30K
40K
2005
6.2K
2008
PurelyOnline
22.0KEnrollment
52.4%
('05-'08)
CAGR
0K
10K
20K
30K
40K
2005
3.1K
2008
PurelyOnline
16.0K
Enrollment
73.2%
('05-'08)
CAGR
# of programs 47
% of Total
Enrollment 4.8% 17.5%
Purely Online
But let us not forget the explosive growth you can
experience in this market place!
Source: EDMC 10-K; Grand Canyon S-1; Analyst Reports; Conference Calls; BMO Capital Report
Education Management Corporation Grand Canyon University
• 12.9K students over
3 years
• Growth driven by
introduction of new
programs and
investment in boosting
enrollment
• 15.8K students over
3 years
• Growth driven by
online capabilities
combined with the
brand name of the
university
Corinthian College
• 8.5K students over 4
years
• Growth driven by
advertising and new
programs
“Getting to 10,000 starts in a five year time-frame is pretty much the industry standard. Grand
Canyon, Corinthian, Westwood College and Virginia College all did something similar.”
# of programs 67
% of Total
Enrollment 73.8% N/A
Purely Online
# of programs 16
% of Total
Enrollment 3.4% 15.2%
Purely Online
THE PARTHENON GROUP
16
About The Parthenon Group
The Parthenon Group is a leading advisory firm focused on strategy consulting with offices in Boston, London, Mumbai,
and San Francisco. Since its inception in 1991, the firm has embraced a unique approach to strategic advisory services;
long-term client relationships, a willingness to share risk with our clients, an entrepreneurial spirit, and customized insights
are the hallmarks for which The Parthenon Group has become recognized in the industry. This unique approach has
established the firm as the strategic advisor of choice for CEOs and business leaders of Global 1000 corporations, high-
potential growth companies, private equity firms, educational institutions, and healthcare organizations.
Advisory Services for Investing in Education
The Parthenon Group advises clients in all stages of investing in education companies, including target identification and
screening, strategic due diligence, portfolio company strategy and operational improvement, and sell-side support. The
combination of Parthenon’s Private Equity Practice, which has advised clients on over 1000 transactions, and our
Education Center of Excellence, which has worked across all aspects of for-profit, public sector and non-profit education,
make Parthenon the preeminent advisor to private equity firms considering investments in the education industry.
For further information, please contact:
Robert S. Lytle Jay Bartlett
Partner, The Parthenon Group Partner, The Parthenon Group
Education Center of Excellence Private Equity Practice Group
(617) 478 7096 (617) 478 4612
robl@parthenon.com JayB@parthenon.com
Assistant: Deborah Spitzley Assistant: Heather Manning
(617) 478 6312 (617) 478 4623
deborahs@parthenon.com hmanning@parthenon.com
About The Parthenon Group and our advisory services
for investing in education
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