Earning and learning: Attracting profitable yet sustainable

investment in education

round tableEducationInvestor

Seen one way, private sector activity in education remains a minority pursuit. Unlike transport or social care, the

delivery of education remains for the most part in public hands. Just look at our universities, colleges and schools.

However, look closer and you’ll see that trend slowly starting to change. Since 2010, the government has welcomed much greater involvement from private providers in the delivery of higher education. Much of our nursery sector is now run by independent providers. And our growing apprenticeship programme is delivered largely by commercial firms. That’s not to mention the continued growth of ‘pure private’ areas of provision, either: independent schools, tutoring and language schools.

But as this trend accelerates, it brings with it questions. Can the goals of investors be aligned with the long term needs of education? How do we build businesses that are both profitable and sustainable? And will the government ever create the policy stability required by business to deliver a high quality service?

To consider these and other issues, EducationInvestor and Regent Group have brought together a panel of experts working across the private, third and public sectors. Over 90 minutes we discussed the biggest issues. Here are the best bits.

What sort of investment should we consider to be sustainable when it comes to education? And what should we consider as unsustainable?

Anne-Marie Harris: I guess ‘sustainable’ is a word that can mean different things to different people, but I suppose ultimately, the most important thing is to have high quality outcomes delivered over a period of time. I suppose one of the challenges is how certain kinds of private equity fund, with three to five year investing cycles, can align their goals when outcomes aren’t achievable within that timeframe. Sometimes an institution will need to make changes and then review whether those changes are making a difference and ultimately translate to better outcomes. But I think you can have a bit of tension there, between the needs of providers and of investors.

Matt Robb: It’s often presented as though there are four levels of morality to this question. So you’ve got not-for-profit charities in education that are only trying to do good in society. And then you’ve got someone like Pearson, who’s kind of pushed the envelope as far as you can possibly push a commercial organisation to say, “Well we will prove that we do good and even if it is a huge risk, we’re still going to go out and do it”. Then you’ve got private sector owners who behave ethically but will try and make money, and finally, there are the people who are purely out to make money.

Earning and learning…

Daniel Thomas Editor, EducationInvestor

Rob Collier Partner, Veale Wasbrough Vizards

Luca Mastrodonato Origination director, Bowmark Capital

Aatif Hassan Partner, August Equity

Selva Pankaj Chief executive, Regent Group

round tableEducationInvestor

The private sector is playing an ever greater role in education – but how do

we ensure commercial and educational goals are aligned? We brought some

experts together to discuss the issues.

But if you think of those four and say, ‘Okay, does the social impact of institutions decline as you go down the spectrum,’ well it’s not obvious to me that it does. Lots of charities, for example, have a very modest impact, and quite a few pure commercial players, particularly in higher education, have actually educated a lot people who would otherwise not have had access to traditional higher education. Take someone like GSM London for example.

Edward Wild: I see that. But I wonder whether when we think about success and sustainability, the emphasis is too much on the return on investment and the multiples at the end of the investment cycle, rather than the achievements of the students. And I think there’s an opportunity there, to look at how you nurture the best students or indeed the best people to lead them. I think that’s something which sometimes gets overlooked in the discussion.

Robert Collier: Honestly, I’ve never come across an investor that doesn’t see the two things as interlinked. They understand that the people who buy their services expect the best possible services, and if they provide them it leads to a successful business which leads to a decent return at the end of the day. So I think they’re part of the same fabric.

Do you think the distinction that is often drawn between the for-profit and not-for-profit sides of education is unhelpful?

Aatif Hassan: I’m lucky enough to have seen it from both sides. I sit as a chair of Minerva Education [a for-profit private school chain, owned by August Equity] and on the board of a charity which provides schooling in central London, and we don’t run either board any differently to the other. Actually, I’ve got exactly the same KPIs at the not-for-profit as I’ve got for the for-profit. So I think it is often an issue of perception rather than reality.

I also think it’s important to remember that education is most definitely a public

service, whether the public sector or the not-for profit-sectors deliver it. Every time this comes up in the papers everyone quotes disaster stories like G4S [the business process outsourcer], but we fail to mention all the excellent private sector companies that have done good for the sector.

Chris Jones: When I look at City & Guilds as a not-for-profit organisation, our board meetings are as robust as any in the commercial environment. But I do think there’s an interesting credential, which is we can look at an investment over a 25-year horizon. We are making investment today into 14-19 curriculum, for example, and that is on a 15-20 year horizon. Now I don’t know of any commercial organisation that naturally and comfortably will look at a 15-20 year time horizon for return.

So I think that can lead to different types of motives to be driven through by commercial organisations. The drive to get a return can perhaps prevent the right decisions being taken by the business that could deliver real value to the educational system as a whole.

Luca Mastrodonato: I think it’s important to mention ‘choice’ here, though. There is always the opportunity to vote with your feet. So I think that when you look at investment timeframes, yes you’re looking at three to five, but actually you’re looking at 10, because ultimately you want to be selling an institution that has achieved the results and is growing and doing well. There’s no interest, I think, for funds in not doing that, because brand longevity is key to their success.

Aatif Hassan: Also, where this sector is challenged is that often it needs huge amounts of investment capital, and here the private sector can help. To build a university, to build a college, to build a school, to build some of these technology platforms that are being built needs some pretty long term capital and I do agree with Anne-Marie and Matt, which is you can’t play short termism in this game at all, it just doesn’t work.

Chris Jones Chief executive / Director General, City & Guilds

Matthew Robb Managing director, Parthenon - EY

Anne Marie Harris Partner, Bridges Ventures

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Edward Wild Managing director, Wild Search

In creating a sustainable education business, how important is leadership?

Robert Collier: Leadership is fundamental I believe at any sort of education institution. I’m also a governor of a state school in Bristol and it’s a school that actually wasn’t doing very well. It is now the destination choice for all the middle class parents that live ‘up the hill’ and it is all down to the head who has turned the school round over the last six years.

Selva Pankaj: Yes, leadership is crucial. And I think we as private sector providers have more scope to incentivise staff and it’s a key advantage.

Anne-Marie Harris: But what I’m curious about when it comes to, say, private schools, is whether the management holding equity ever causes tension? Presumably you’ve got scenarios where some staff are shareholders, and some aren’t. Obviously it’s a very positive dynamic in lots of other industries to let staff share in the wealth creation. But can it be a challenge in schools?

Aatif Hassan: No, not at all. The private equity industry have different models, most I would say don’t incentivise the teachers or the heads through equity, but do it though salary and some performance related pay. At Minerva we incentivise our teachers to the best job in the classroom they can, and not to drive profitability.

Chris Jones: I think that’s an interesting question more broadly for the not-for-profit sectors. I think the concept of remuneration and reward is something that the not-for-profit sector has to get its head around, because quality of education is very much driven by the quality of a teacher.

The college group that I’m a governor of, we’re beginning to look at how do we genuinely re-visit traditional models of compensation for teaching staff. We can’t clearly go into an equity model, but we’re having to think differently about how we reward, because the incentive must be there to drive a better quality. It’s a real challenge for the system, the sector as a whole.

Edward Wild: What about the idea of

linking pay for teachers to the numbers recruited to a school or institution?

Aatif Hassan: Well this plays into your promises about class sizes. We generally stick to 16 in a class, although sometimes it’s higher or lower. Yes it might be attractive to increase numbers beyond promised limits in the short term because that seventeenth child is pure margin. However, certainly in prep independent education, if you seriously broke those sort of promises, it would get around the sector fast and damage your reputation.

What about the role of the private sector in delivering public sector education? Is its contribution underplayed?

Aatif Hassan: If you look at areas like education & youth services and special needs, they both have had a huge amount of government intervention over the last 10 years. And actually, particularly in special needs education, you could argue the government hasn’t done as well and the private sector has dominated, because actually it can provide better solutions. That’s because

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they can pump money in in a way the local authority can’t and

market their services more effectively. They’ve also invested in understanding and differentiating between issues like high functioning autism, severe dyslexia and profound learning difficulties. 10 years ago they were all put into one bucket.

Matt Robb: That marketing spend usually leads to differentiation. Marketing forces you to compete rather than offer a blanket solution. Gradually you’d hope the market will reassemble itself around a number of high quality specialist solutions.

Chris Jones: But I think another side of this is that when the government has pumped quite considerable amounts of cash into a market, many people see it as great opportunity to make a profit. But perhaps the longer term motives are not necessarily quite as clear. Train to Gain (a New Labour scheme to provide free education in the work place, scrapped in 2010) was a relatively easy source of funding, but offered very low quality in terms of development and by and large pretty poor outcomes in terms of quality and progression. So I think it is quite an interesting issue: when a government stimulates a market, does it stimulate it for the right purposes? Can it create some dysfunctionality in the sector as a whole?

Selva Pankaj: Personally, as an operator, I think the initiative to widen participation via the private providers within the HE sector is an excellent effort to reach the type of students who would not normally have accessed or been able to access a traditional university environment. I think the approach to such initiatives could be strengthened through clear guidance for various stakeholders so that ultimately the right students get the right educational experience. Naturally however, bringing in any change of regulation during an academic year can interrupt the provision by the institution, and thusly, its students.

Private higher education is a great initiative for widening participation, but, in hindsight, more thorough regulations would bring greater clarity for all involved, the providers, the awarding bodies, the quality bodies, the government agencies, the funding partners and of course, the students. The recent re-designation process, carried out by BIS and HEFCE was, I think, a robust process. The current regulations will align the interests of all stakeholders. Alternative providers help meet the aims of the widening participation initiative.

The US offers a worst case scenario here. For-profit providers have lost access to publicly funded loans due to questionable marketing promises and other factors.

Chris Jones: I think that US environment does raise an interesting question as to how comfortably the drive for profit sits alongside the whole concept of academic success or progression.

Matt Robb: But it’s important to remember that private providers typically attract the less able academic students, therefore retention rates will be lower. The question is more about the public purse: how much wasted spending are you prepared to tolerate in order to get one disadvantaged student through who would otherwise not have access to education. And I don’t think there’s a perfect answer to that, it’s a genuinely political question. But the idea that the private sector should have the same completion rates or should be benchmarked against the public sector just misses the point.

Selva Pankaj: I agree, I think sometimes we miss the ‘value added’ point. People of a lower ability also need to progress, and they may end up performing very well in more vocational, less academic fields. But recognition is too often given only to the top performing pupils. We also forget about the happiness of pupils; development of character is also key.

Anne Marie-Harris: I think there’s an issue here around how we measure success. Of course education on the one hand has very, very clear ways of measuring outcomes through exams. But for students who need more attention, actually it might mean something quite different, like improving attainment levels or lowering truancy rates. And it’s much harder to benchmark the impact interventions can have on pupils when it comes to these metrics. ▶

Edward Wild: Absolutely. I also think the concept of the league table needs to be re-visited, to see what it’s actually assessing, certainly in secondary state and private schools. Not all the institutions we’re discussing will be able by nature of the input of students to become top of the league tables. I think a lot of independent schools have opted out of tables actually.

Policy shifts are clearly the biggest obstacle facing commercial providers delivering public sector education services.

Matt Robb: Yes, vocational is a good example. Vocational and employability programmes have been absolutely mashed in the last five or so years. The introduction of the work programme and its implementation wiped out a whole bunch of perfectly good businesses and the jobs and all the other stuff that goes with it and people kind of quite casually say, ‘Oh, well they’re private providers’. So a longer term regulatory framework would help the vocational sector.

Edward Wild: But isn’t there an inconsistency of government policy in terms of endorsing or supporting the private sector in FE under the umbrella of the business department (BIS), but not the secondary sector under the umbrella of the Department for Education (DfE)? It feels like a lack of joined up thinking.

Matt Robb: There is a sort of fundamental inconsistency here, which is very hard to ascribe noble motives to. I would be happy to see private providers in state secondary schools teaching mainstream kids in a market environment, but it’s too mainstream. The government won’t do it for political reasons. But I think you can do it in vocational because it is a sort of Cinderella sector, and historically it’s been ignored.

Robert Collier: Like all businesses, whether you’re a law firm, a publisher, a school, you want certainty of the environment to be able to invest and if you invest you grow and I think that’s all we can ask for really. An environment that is certain, so

we can make sensible business decisions. But if we’re talking about investors having three, five or 10 year timelines, you can’t have a more limited time horizon than the government, whose term cuts off at five years.

Matt Robb: Yes. This is the first year, certainly in the last five, that deal value has fallen and it’s fallen precipitously. The number of completed deals in education in the UK was tiny. My belief is that investors are effectively saying, we’re not going to invest in education until we’re on the other side of the election. What’s happening is assets aren’t coming to market, or they’re coming to market and people are saying, ‘I can’t give you full value for this because it might be worth tuppence in June of 2015’.

Luca Mastrodonato: I think if you look at education generally over the last three or four years, there’s been so many changes that have impacted education, whether you’re looking at international higher education, UK local education authority changes. But it’s not a sector that is new to change and I think it can still offer opportunities if you do your due diligence.

I would also add that a number of service providers we’ve spoken to actually are looking internationally. It’s tough clearly to aim at a market in the Middle East and so on, but the upside is quite considerable. I mean, you’re looking at running schools with 5,000 to 10,000 students and although it does take some time to build your brand and so on, I think there one a number of providers which are looking to do that. Whether that is driven by the lack of certainty in the UK market, I don’t know. n

The above is an edited transcript, and is not reported verbatim. The panel met in central London on 21 October 2014.

For information on EducationInvestor round tables, call Elizabeth Matthews on 020 7451 7056 or email elizabeth.matthews@investorpublishing.co.uk

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THE FINAL WORD

Earning and learning, and their compatibility, is a concept every leader should embrace and think about when leading an educational organisation; perhaps it ought to be learning and then earning. Education is a noble profession. It encompasses teaching and learning specific skills and facts, and also something less tangible, but more profound: the imparting of general knowledge, good judgment, integrity and wisdom. After all, education has, as one of its fundamental goals, the aim of passing down these essential traits from generation to generation.

At Regent Group our ethos is: ‘The end of education is character.’ Through the gradual process of acquiring knowledge, education becomes a preparation for life.

Like all commercial businesses, educational businesses face the same challenges of building a long-term profitable, yet sustainable, business model led with unyielding integrity.

Educational organisations should organise themselves around a mission-driven culture with core values and dedication with determination to contribute to wider society. A strong ethical culture and robust leadership can strengthen team morale, improve customer satisfaction and the profile of the institution, and ultimately, this results in a profitable and successful business.

High levels of academic achievement are a good measure of quality. However, the value added in assisting lower ability leaners, as well as higher ability learners is not something that should be overlooked. Market differentiation and service differentiation are not new concepts to business leaders and these are equally valid in the education sector.

One of the key success factors for attracting sustainable investment in education is the quality of leaders and their ability to inspire others to find their voice. A powerful lesson we need to foster within emerging younger leaders is that of learning by teaching and doing. That is, sustainable business ethics requires ‘teachable point of views’.

At Regent Group we strongly believe that not only are we there to educate our customers, but also to learn ourselves. We constantly look for ways of improvement and deploy effective strategies to improve our processes and procedures to obtain efficiency and effectiveness.

Finally, we commit to the business strategy that our students are indeed our customers; customers trust in

businesses that go beyond serving the profitability of their business. In short, if one concentrates on

‘people and purpose’ then the rest will follow, even in this rapidly changing and dynamic educational

world. n

Selva Pankaj Chief executive, Regent Group