Thursday, 13 October 2011

Duke Street

Education Investor reports that the private equity firm Duke Street are seeking to enter the UKHE market. Duke Street already have investments in the private post-secondary sector in Europe through EduServices, but their portfolio in the UK does not yet include such a company.

So clearly I have to concede something to Andrew McGettigan. This is a specific report of someone specifically looking to invest, it is more than mere noise and rumour. What kind of HEI might fit into Duke Street's range of 'enterprise value up to €300 million (£260 million)'?

Enterprise value is a technical term relating to the market value of a company plus its outstanding debts, so no existing HEI can have an 'enterprise value' by definition. There are a number of other ways one could value a business, though. This isn't my expertise, but let's apply a couple of methodologies to the College of Law (plucking this example, I emphasise, entirely at random), and see if we come out at the right order of magnitude.

Earnings before interest, taxes, depreciation and amortization (EBIDTA) is a measure used to assess the cash generated by an organisation. An investor puts cash in in the hope of getting cash back out later, so you can see the sense in this. The value of the business on this model would be some multiple of EBIDTA, with the multiple depending on issues like future prospects for growth at the time of sale. My (rather limited) understanding is that 10xEBIDTA would be a typical price for a strong business. The College of Law generated cash of £7.1 million in the year (£4.1 million in 2009) from operating activities. Tax plays a small role and investment income is more important than interest payments (in fact, as far as I can see, the bulk of creditors carried on the accounts relate to accruals and fees, subscriptions, etc. received in advance). There is a finance lease interest payment of £392,000 and deprecation of £1,547,000 so the EBIDTA is (roughly) the College income of £60.642 million minus expenditure of £53.164 (thus ignoring income/expenditure from investments), plus these two adjustments: £9.417 million.

Alternately, we could look at the balance sheet which shows net assets of £86.925 million. A business ought to be worth more than the sum of its assets, just as you expect to pay more for an actual piece of furniture than you do for a box of parts from Ikea. On the other hand, not all the assets would necessarily be privatised in a privatisation. Investments might be retained in the charity, and fixed assets such as buildings could also be retained in charitable ownership and then leased out to the profit-making business.

So neither of my two methodologies gives you a good sense of 'what might I have to pay for the College of Law?', but I think they do give you an answer to the question 'is the College of Law within Duke Street's range?' and that answer is 'comfortably'. In fact, you could do two deals that size to build a bigger business (which, it seems, is more or less what happened with EduServices). The College of Law is on the small side compared to a public university, but not tiny.

However we shouldn't forget that private businesses already exist in both FE and HE. Even if a deal goes ahead, it may be simpler to invest in an existing private post-16 business than to run the risks associated with novel corporate forms, TUPE, and perhaps staff resistance to entering the private sector. Many of these businesses are tiny, but not all. Private equity could offer a business in this class the financial backing (and management support) to grow explosively if the right regulatory framework is put in place from 2013. I would still rather bet on an outcome like this than a wholsale privatisation of an existing public provider.


  1. Very generous of you! Here's a story about Goldman Sachs takeover of Education Management Corporation.


  2. If I were a small private company, I would be worried about Pearson degrees. As an major investment I'd want something more niche or more established, I think.

  3. There are a number of US education companies with UK subsidiaries - BPP, RDI, for instance - which are returning cash to their shareholders at the moment (see or Now here comes someone with cash looking to enter the UK education market. Finance isn't really my thing, but this looks a much more straightforward basis to do business than any conceivable privatisation. From the story you link to, EMC was already private sector when Goldman moved in.