Education pays off for buyout firms

The post-secondary education market has emerged as a beacon of counter-cyclical hope to buyout shops, thanks to economic and demographic trends.

Though the education sector represents a tiny portion of the overall leveraged buyout market, public and private exit activity in the sector has jumped this year. Among the more high-profile exits of education companies is the $140 million IPO of Bridgepoint Education Inc. (backed by Warburg Pincus) and the $126 million IPO of Grand Canyon Education (backed by Endeavour Capital), according to Thomson Reuters (publisher of PE Week).

Education-related assets “tend to be the bright spots in a lot of portfolios these days,” says Erik Carneal, a managing director at investment bank Piper Jaffray & Co. “From that perspective, it’s a good time to cash in on the strong performance of an existing portfolio company.”

The need for many workers to retool their skill sets as the United States continues its shift from a manufacturing economy to one that’s more service-based has many adults returning to school to beef up their resumes. Add to that a growing acceptance of online classes, which allow students to pursue a degree at their convenience, and the result has been steady and robust growth for many post-secondary education providers, including for-profit universities and trade colleges.

“This is a long-term trend that’s been emboldened by the unemployment rate,” says Jeff Barber, a managing director at TA Associates.

The latest education-related company to exit was the $360 million IPO of Education Management earlier this month. The company was acquired in 2006 by Leeds Equity Partners, Goldman Sachs Capital Partners and Providence Equity Partners.

Though Education Management (Nasdaq: EDMC) priced at the low end of its $18 to $20 a share range, shares of the company, which provides post-secondary education degrees, later surged to a high of $23.62. Last Wednesday, shares in the 47-year-old company were trading at nearly $26, about 45% above its IPO price.

“People are going to go to college and people are going to get educated, regardless of whether the economy is good or bad,” says Jeffrey Leeds, president and co-founder, of Leeds Equity Partners. “When times are difficult, people contract their spending, But you don’t cease to invest in your education. You can’t.”

In September, Endeavour Capital-backed Grand Canyon Education (Nasdaq: LOPE), a 60-year-old, for-profit institution, priced a $16.50 per-share secondary offering after launching its IPO at $12 a share last November. Last Wednesday, shares of the 60-year-old company were trading at $19.56, a 63% premium to its IPO price.

Warburg Pincus-backed Bridgepoint Education (NYSE: BPI), meanwhile, sold 13.5 million common shares at $10.50 each in its April IPO. Last Wednesday, shares in the company were trading at $16.76, nearly 60% higher than its IPO price.

On the M&A front, Wellspring Capital Management last month sold Vatterott Educational Centers Inc., a post-secondary education provider with more than 7,500 students, to Boston private equity shop TA Associates. Josh Cascade, a partner at Wellspring Capital, declined to disclose financial terms of the sale. But he notes it was a “very successful exit for Wellspring.” Wellspring Capital had already recouped the $40 million in equity it invested in the company via a May recapitalization, according to market researcher Capital IQ.

Elsewhere, The Carlyle Group in April sold Wall Street English, a provider of English language training to adults in China, to Pearson PLC, in a deal reportedly valued at $145 million. The firm acquired Wall Street Institute, the parent company of Wall Street English, in 2005 for a reported value of $40 million.

Despite these recent deals, investments in the educational services sector represent only a miniscule portion of the overall LBO arena. They often account for between 1% and 1.5% of annual buy-side deals, and recent data shows no evidence of rising interest.

Of the 424 control-stake deals closed by U.S. sponsors in the first nine months of 2009, only four were in the educational services sector, according to Thomson Reuters.

In 2008, 12 of the 1,052 deals were in the sector, and in 2007, 16 of the 1,442 deals were in the sector. That could change quickly, however, thanks to the string of successful public offerings the sector has seen this year, according to Piper Jaffray’s Carneal.

Private equity pros “think of an exit before they ever make their investments, so if they know an IPO exit is a real possibility, that of course will help drive interest in terms of them getting into the sector,” Carneal says.

Carneal adds that he’s recently seen more activity on the M&A side of the industry with both potential buyers and sellers feeling out the market before jumping in.

Susan Wolford, a managing director at advisory shop BMO Capital Markets, has also seen an increase in LBO interest in education. On Sept. 17, the investment bank held its ninth annual Back To School Investor Conference, which drew a crowd of 800 institutional investors and industry professionals, one-third of which were representatives of private equity firms, according to Wolford.

“The distribution of people that attended, I think, is very telling of the interest of the sector and its long-term prospects,” she says.

However, it remains to be seen whether the increased interest actually turns into closed deals.

A longer version of this story recently appeared in Buyouts, an affiliated publication to PE Week.