Jeffrey Leeds and Bill Weld, principals and namesakes of education-focused private equity firm Leeds Weld & Co., are longtime champions of public school privatization. They have sat together on the board of industry trailblazer Edison Schools Inc. (Nasdaq: EDSN), and even helped secure a $40 million bailout when the public company hit financial trouble last summer. So it was with great surprise – and more than a bit of cynicism – that Leeds Weld earlier this month announced that it would avoid future investments in companies that privatize public schools.
;Investors frequently fail to recognize the political risks posed by investment in companies that pursue privatization of education, and the consequences of long-term financial performance of these companies,” explained Jeffrey Leeds in his firm’s prepared statement. “Leeds Weld no longer views companies that pursue privatization of education as likely to generate the long-term growth necessary to offset these risks.
What industry sources are questioning, however, is why Leeds would make this claim while simultaneously scoring big on his Edison investments. Not only were he and Weld individual investors in the company at the time of its 1999 IPO, but the pair’s firm stands to post a 1.95x profit on outstanding Edison warrants if shareholders accept a management buyout offer co-led by Liberty Partners and Edison founder and CEO Chris Whittle.
One analyst thinks that the answer may lie in a backdoor strategy of private promotion by public degradation.
;Leeds Weld will do quite nicely if this [buyout] goes through, and the chances of that happening are aided by folks dumping on Edison,” says Trace Urdan, a senior research analyst who covers the education market for San Francisco-based ThinkEquity Partners. “Some larger shareholders think that the offer is too low, so it helps the deal get done if others are convinced that there isn’t an institutional market for the stock, and that shareholders should take what they can get.
Perhaps even more important to Leeds Weld is that its Edison investment was causing headaches on the fund-raising circuit. The firm has been marketing its fourth fund for over 18 months, but only had $104.75 million as of an SEC filing this past April. One source close to the firm says that it now has over $200 million in commitments, but it still isn’t close to its $500 million target.
What’s been the problem? Part of it has been that Leeds Weld is essentially sporting new management. Bill Weld had only been an advisory board member until late 2000, while former Simon & Schuster CEO John Newcomb signed on just last year. The result has been a significant lack of relevant liquidity events, which caused serious concerns among potential limited partners.
Adding to the problems was Leeds Weld’s involvement with Edison Schools, and its outspoken support of privatized K-12 education. The group’s position didn’t sit very well with the Service Employees International Union (SEIU), which boasts 1.5 million members and is an outspoken opponent of public school privatization. In particular, the SEIU was upset that Leeds Weld was trying to recruit the California Public Employees’ Retirement System (CalPERS) as a new limited partner.
;The SEIU is making an effort to have sure that public pension fund dollars are invested in responsible investment firms,” says Cathy Sarri, director of the education sector of SEIU. “How can you invest in a firm that will take your dollars and invest in services that will privatize you [pensioners’] jobs?
The SEIU went straight to work on CalPERS, plus some other smaller pension systems that were considering Leeds Weld as a new investment. It didn’t try opposing other Edison Schools investors like J.P. Morgan or Sprout Group, but Sarri says that was more a matter of practicality than principal. CalPERS didn’t have any history with Leeds Weld, unlike it did with some of the other [Edison] investors,” she explains.
CalPERS ultimately decided against investing in the Leeds Weld fund (primarily based on its incomplete track record), and the firm didn’t even bother contacting many teacher-related pension funds. Once he learned of all the Edison-related commotion, Jeffrey Leeds got in touch with the SEIU. “We reached out to SEIU and started to talk and discuss the fact that we had some common ground,” Jeffrey Leeds told PE Week.
The result was the firm’s statement against public school privatization, which was issued in concert with the SEIU. What remains unclear, however, is whether or not the move can revive Leeds Weld’s stalled fund-raising efforts.
;I think that distancing itself from Edison is a smart move from a fund-raising perspective,” says one fund placement agent who’s seen the Leeds Weld book. “If you combine that with the fact that the firm finally has begun getting some strong liquidity events – like Ross University [ed. 5.2x ROI] – then it’s possible that they may actually be okay.
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