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Investors Learn Value Of For-Profit Colleges
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Published: February 12, 2008
LARGO - Things may look bleak for Florida's public university system, where schools are slashing budgets and laying off workers because of a tight state budget.
But for some schools in the for-profit college industry, money is flowing.
Investors with big pools of cash, such as private equity firms, have pumped millions of dollars into the industry in the past few years, and some of that cash has been used to snap up small Florida colleges and expand their programs. The moves mirror a national trend: private equity firms are spending billions to buy for-profit career colleges so they can build enrollments and then potentially spin them off for big profits.
Locally, Knowledge Investment Partners, a private equity firm based in Cleveland, bought Largo-based Schiller International University, which specializes in business programs, in September for an undisclosed sum. KIP wants to boost enrollment and add three new campuses to the six Schiller has overseas, said university Provost Cathy Eberhard.
Other Florida schools that have been bought include Lauderdale Lakes-based Florida Career College, which has two local campuses, and Florida Coastal School of Law in Jacksonville, one of the nation's only for-profit law schools.
The career college industry has taken some heat in the past over allegations that it recruited unqualified students to boost profits and skepticism about school accreditation. In 2004, industry giant University of Phoenix paid $9.8 million to settle charges that it paid recruiters based on the number of students they enrolled, a violation of federal regulations.
Still, some for-profit colleges have succeeded by drawing millions of students and opening new campuses or degree programs quickly to capitalize on changes in the labor market. With the flood of private investor money into the industry, for-profit colleges may be able to open new campuses and attract students who otherwise might go to state schools or community colleges.
"A lot of higher education traditionalists don't like the rise of for-profit schools, I think, but it is happening," said Donald Jones, chief executive of a foundation that oversees Fort Myers-based Southwest Florida College. Unlike many peers, Southwest Florida College is a nonprofit career college.
Many career colleges got their start decades ago as small, family-run operations. But by the late 1970s, big players such as the University of Phoenix appeared on the scene, said Harris Miller, chief executive of industry trade group Career College Association.
Offering Real-World Skills
Most of the largest for-profit college companies are publicly-traded, including Phoenix-based Apollo Group (which owns University of Phoenix), DeVry Inc. of Oakbrook Terrace, Ill., and Corinthian Colleges of Santa Ana, Calif., the owner of Everest University, formerly Florida Metropolitan University. Companies like Apollo Group generate more than $2 billion a year in revenue - a testament to the exploding interest in adult education and career training.
These operations have grown quickly by offering real-world skills training for adults. Students often are working adults who want to learn computer programming, paralegal skills or culinary arts. Some schools have broadened into fields such as international business.
Making a big push into the industry in recent years have been private equity firms, which get their cash from pension funds, insurance companies and wealthy individual investors.
Between 2000 and 2006, an average of 107 colleges a year changed ownership, according the U.S. Department of Education. In 2000, only 3 percent of the ownership changes involved private equity firms. But by 2006, private equity firms were involved in 37 percent, the agency said.
Many of the buyout targets were small colleges. But in March 2006, two private equity firms paid $3.4 billion for Education Management Corp. of Pittsburgh, which operated 72 campuses, including Argosy and South universities and the Art Institutes, all of which have Bay area campuses.
More recently, the Leibrecht family, which owned Schiller International University in Largo and its six European sister campuses, decided to sell. Among other programs, Schiller focuses on international business degrees. It has 500 students at its Largo campus and 1,200 students throughout its system, Eberhard said.
Knowledge Investment Partners Chairman Robert Daugherty could not be reached for comment. In a letter to students and faculty posted on Schiller's Web site, Daugherty said his firm wants to boost Schiller's enrollment at all of its campuses and add as many as three campuses, potentially expanding to Asia, the Middle East or South America.
Since buying Florida Coastal School of Law three years ago, private equity firm Sterling Capital Partners has tried to expand the for-profit law school concept by opening two new law schools in Phoenix and Charlotte, N.C.
Large Potential For Growth
Driving investors' interest: the industry's huge growth and healthy cash flow, said Chas Edelstein, an investment banker with Credit Suisse who works with for-profit colleges.
From the 2002-03 school year to the 2006-07 school year, enrollment at degree-granting career colleges in Florida, such as University of Phoenix, more than tripled to 250,652 students from 67,939 students. Enrollment has fallen by a third, however, at non-degree granting institutions that offer career certificates, according to the Commission for Independent Education.
Meanwhile, for-profit colleges generally have healthy cash flow because students must pay tuition up front, so the colleges don't have to wait for payment such as other businesses.
And, with the explosive growth in online classes, for-profit colleges can educate thousands of students without the cost of classrooms, Edelstein said.
It's not clear how profitable small, for-profit schools are. Many career colleges specialize in teaching massage therapy, truck driving, cosmetology, and the like, and occasionally run into financial trouble. During 2006-07, 61 career schools closed in Florida, most of them small institutions, said Samuel Ferguson, executive director of the Florida Commission for Independent Education, a state office that regulates career colleges.
Effect Of Downturn Unpredictable
The biggest schools have generally done well, however, with enrollment and profits growing, said Guilbert Hentschke, a professor at the University of Southern California who has written about for-profit schools.
For example, Strayer Education of Arlington, Va., the operator of Strayer University, saw revenues of $263.7 million in 2006, compared to the $116.7 million it booked in 2002, according to financial reports. Profits also doubled to $52.3 million from $25.8 million over the same period. And ITT Educational Services, which operates the ITT Technical Institute franchise, saw revenues and earnings soar over the same period.
With the Florida and U.S. economies weakening, for-profit schools and their investment-firm owners could see mixed fortunes. On the downside, banks and big student loan companies, such as Sallie Mae, are cutting back on loans to the riskiest students. That could hurt for-profit colleges, which have among the lowest graduation rates of all colleges.
On the upside, career colleges historically have prospered during weak economic cycles because nervous or laid-off workers want to learn new skills, said Edelstein at Credit Suisse.
Reporter Michael Sasso can be reached at (813) 259-7865 or msasso@tampatrib.com.
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