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For-Profit Education


gg
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I'm interested in learning more about the for-profit education industry. There are a lot of bad headlines out there, and probably many bad actors, but in theory, I think a long term solution to the USA's student debt problems and mismatch of job openings to the skill levels required of skilled are efficiently run trade schools that can teach students practical skills at a reasonable price (enabling students to learn a while not forcing the students to go into enormous debt.

 

I've done a fair amount of research into the space already, and I'm curious if there are any board members that are experts in the industry (i.e. employees, directors, investors in the industry).

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I'm by no means an expert, or even a novice, but I'm familiar with the industry.  I have a family member who ran an industry training program professionally.  It was a school funded by a company.  It was in a trade, HVAC.

 

From our discussions it's a really really tough industry.  Costs are high and it's hard to find students.  Students might want to take courses to further their career, but employers can be tentative about paying.  Sometimes training means the student will be skilled beyond their position and will either leave or want a raise.  The companies paying for training are running on shoestring budgets.  Think smaller service companies, plumbing companies with five trucks, or a HVAC company with ten trucks. 

 

There can be a lot of overhead for these trade programs as well.  You need fully outfitted labs to instruct on.  I own shares in LabVolt (good luck getting information..) and they develop products for this purpose.  A training module might run $30-40k per piece.  A lab might need 5-10 of these modules.  You can't push a ton of students through the class because lab size is limited, there's only so much space and only so much time for hand-on learning.

 

I understand how the crummy for-profits worked.  They pushed kids through with sub-par education.  Quality education is costly, and unfortunately not many students want to pay for it.  They simply want the certificate so they can apply for a better job.

 

One aspect that's always fascinated me are these seminars.  Things like value investing seminars.  You get 200 people to pay $2k a pop which is $400k gross.  Then you pay $20k to rent a room, $50k to speakers, and another $10-15k for food.  It's a really profitable event, the problem is you can only have a few a year, and they don't scale well.

 

For-profit education is a great example of extremely high returns that aren't scalable.  If you become an expert in a field you might be able to get speaking or training gigs for $20-30k an event or more.  The problem is this is limited by time.  A single person could make a great salary doing this.  It can be profitable for a small training group as well, but once things scale returns drop dramatically. 

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It seems to me that this is a business that should or could have returns that are scalable. As you note; acquiring students is one of the hardest part of the business, and I think advertising is a classic example of where you can have economics of scale. The fact that for profit education companies generated high margins and high returns on equity for years also suggest that this is a business that is pretty scalable. Check for example the historical numbers for STRA.

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It seems to me that this is a business that should or could have returns that are scalable. As you note; acquiring students is one of the hardest part of the business, and I think advertising is a classic example of where you can have economics of scale. The fact that for profit education companies generated high margins and high returns on equity for years also suggest that this is a business that is pretty scalable. Check for example the historical numbers for STRA.

 

The situation is similar to Fannie/Freddie. The industry depends on liberal lending to students that are on the bottom of the barrel. Currently, most of the lending are done by the government. There could be a public outcry if default rates become bad enough. The recent example of winding down Fannie/Freddie shows that the public has no tolerance for socialized loss and private gain anymore. To build a sustainable business, the student and the school both need to sustainable ROIC. The students are not getting their returns.

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Here in Canada we don't really have the perverse government subsidies.

 

But private education exists because they are selling a dream and some people think that they can buy themselves a job after paying the ridiculously expensive tuition.  I don't think that the students get a very good deal at all... yet they will attend a private educational institution.  The business model works without government subsidies.

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I've had various long positions in ESI (some long stock, some short puts, some long calls at various times) basically on the dead cat bounce theory. It was really, really cheap. I still own some, but its less cheap than it was.

 

It wouldn't be a good business with a long term future.

 

What is, is something like PetroSkills. I've taken a few of their courses as part of my job, they're about 5k for a week of training in a hotel's meeting room. They're generally good, with curriculum and expert instructors (who would be expensive). But 5k in tuition times 30-40 students is real money, and they seem to have scaled it up. Multiple courses are offered in each city with oil and gas. The company is currently owned by a private equity firm who bought it from the founders, I'm watching for the IPO when they need to exit.

 

I'm sure other industries have similar companies, that just happens to be one I'm familiar with that probably makes excellent ROIC. Their moat is the relationships they have with large O&G companies and the fact that everyone in industry has heard of them, which makes it easier to get the training expense approved.

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There was a thread sometime ago on this exact topic.

http://www.cornerofberkshireandfairfax.ca/forum/strategies/investing-in-%27for-profit%27-industry/

 

I posted some links on that other thread, so you may want to look at that.

 

Even though the for-profit education sector provides a much needed benefit to society, 'For-profit education' today - for reasons that are somewhat justified - has become a dirty word for most people in this country. The public, influenced by scathing media reports of unscrupulous enrollment practices and touching personal stories of students being unable to pay down their debt, are too willing nowadays to crucify them or cast them out as pariahs. Even though, I do not support the unethical practices of some of the for-profit education companies, I believe that they perform an useful service in 1) meeting the demands of students that do not have the time/resources ( not limited to tuition) to attend public universities/colleges and 2) filling a gap in the education sector by providing training/education in areas that non-profit universities or colleges do not provide. Unless the public education system fulfills the 2 needs mentioned above, I do not see any realistic chance of obsolescence for this industry.

 

 

Also, there is a widespread belief amongst investors that if the govt. were to stop or slow down it's lending to students, the for-profit education companies will go out of business. I think this is nothing but fear-mongering and extrapolating recent negatives to extremes.

There is no doubt that reduced govt subsidies will change the structure of the industry and these companies will suffer considerably. Some of the more unscrupulous and weak for-profits may even go out of business, but quite a few of them will adapt, find their own niche and thrive.

 

My conviction stems from my observation of for-profit educational institutions in other parts of the world. If you look at the for-profit education industry in countries that do not provide much in the way of govt subsidies, you will notice that many of them are doing quite well ( check out the for-profit education sectors in India, China, Middle East,Africa etc or even in some European countries)

 

Why would a model of education that has been successful in other parts of the world, not succeed in the US without subsidies? In fact, in absence of govt. subsidies, supply/demand and market forces should take care of most of the issues that have plagued this industry in recent times. I am quite optimistic that the for-profit education in the US will transform itself under increased govt scrutiny and media/political pressure and come out of this stronger and better ( btw, I invested in a few for-profits last year and have done quite well, so I am definitely biased). 

 

 

 

 

 

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'For-profit education' today - for reasons that are somewhat justified - has become a dirty word for most people in this country.

 

Kind of ironic given that the fundamental cause of the issues in the industry is the government's unconcern with profit.

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GG:

 

This is something that I am pretty vocal about.

 

I know something about the industry...

 

I've gone through some myself for professional licensing.  That was VERY expensive, but good.  The vendor provided what they said they would and it was a fair, open, honest transaction.  I am SURE the provider was making a wheelbarrow of money all the way to the bank.  No problem their.

 

The problem is with more general, downmarket education.  I am talking about skools that you will see advertised on the television.  These are generally TERRIBLE deals for their students.  This is what most of the industry is made up of.

 

I don't know of any "pure play" that is doing high level stuff.

 

You've also got the problem with the lower level stuff that the government is paying close to 100% of their revenue.  Many skools get capped out 90%, but they've all got ways around this...

 

I think the way the industry is currently set up, is TERRIBLY socially destructive.  Change can't come soon enough. 

 

 

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Arent MOOCS going to clean up these schools? Unless you need to learn practical skills in some kind of lab, it seems horribly overpriced. Seems like company's like Strayer are just going to dissapear because they offer a terrible value proposition compared to MOOCS. Especially as these online courses start to gain more credit with employers and you can actually get degrees with them.

 

Not sure if that is already the case, Im not v up to date on all that.

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