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THE PARTHENON GROUPBoston • London • Mumbai • San Francisco

Where are opportunities and how

can you capture them?

Investing in Education

Robert Lytle

Summer 2009

THE PARTHENON GROUP

2

0%

20%

40%

60%

80%

100%

Estimated For-ProfitEducation Revenues

K-12

Pre-K

Corporate Trainingand Other

HigherEducation

$96B

Pe

rce

nt

of

To

tal O

nlin

e E

nro

llme

nt

Where can financial investors play?

The United States is the single largest education market

in the world with a for-profit sector roughly $100B in size

● The U.S. spends ~40% more per K-12 student on

average than other industrialized nations; the gap is

even larger for post secondary spending

● Our enormous public K-12 system presents vast

opportunities

− ~50MM students in the public system

− ~ 6.2MM in private schools

− Only a small fraction on-line

− ~14,200 public school districts containing 97K

public schools (including 4K charter schools)

● We have a post secondary system second to none —

perhaps one of the U.S.’s next great ‘exports’

− Over 18MM students are attending 2- and 4-

year colleges and universities

− Over 4,200 degree-granting institutions

THE PARTHENON GROUP

3

● Many big, high profile deals every year…

Many of you are moving to make

education an explicit investment focus

● Activity that continued even in the trough of the deal

market….

● Expectations of many to come over the next 12-18

months….

● And fertile ground for proprietary opportunities0

20

40

60

80

100

2005

64

2006

87

2007

62

2008

45

2009YTD

9

Pre-K

K-12

Higher Education

Corporate Training and Other

Education Sector Investment Activity

Source: BMO Education Market Equity Report September 2008; Stifel Nicolas Post Secondary Education FactBook; Capital IQ Education Industry, pulled July 2009

THE PARTHENON GROUP

4

0%

20%

40%

60%

80%

100%

Pre-K

Work-site

Standalone

$13B

K-12

Education Software

Gaming

Testing and Assessment

Schools

Outsourced SchoolManagement

Student Support Services

Professional Development

Publishing

$23B

Higher Education

Technology

Textbook Publishers

Institutional Services

College Bookstores

For-profit Universities and Colleges

$45B

Corporate Training and Other

Reference

CorporateTraining

$15B

PercentofTotalIndustryRevenue

ESL Testing and Assessment

Total = $96.3B

Parthenon sees significant investment opportunities

across this vast education landscape

Deals are everywhere, but require different approaches

and the understanding of radically different business models

U.S. Estimated For-profit Education Revenues

THE PARTHENON GROUP

5

● What is your target

transaction size?

● What business models are

most comfortable to you?

● Will you do non-traditional

structures (e.g., non-profit

conversions, JV / NewCo

structures, minority

interests)?

Where are

the deals?

Can this growth

continue and is it really

counter-cyclical?

What impact should I

expect from regulatory

changes and stimulus

money?

How can I ever justify

these multiples?

● What sector are we talking

about?

● Over what duration? (Note:

many different penetration

curves exist in the

education space)

● When you say growth, do

you mean market growth or

the opportunity for share

gain?

● Are you interested in

primary impacts (e.g.,

stimulus money available to

your target, effects of

announced regulatory

changes)?

-or-

● Secondary and tertiary

effects that are more

political, directional, and

speculative in nature?

● Do you know the sector

dynamics and the business

model really, really well?

● Do you have a strong post

acquisition play book?

● How well can you

supplement the

management team post

acquisition and what is your

experience as an activist

owner?

In the last year, Parthenon met with ~100 investment

firms around the world to talk about education investing

– You all ask us variations of the same questions

You Ask Us …

And We Ask You …

THE PARTHENON GROUP

6

0%

20%

40%

60%

80%

100%

Pre-K

Books and Toys

Child Care

36

K-12

Training and Professional Development

Student Support Services

Schools

Publishing

108

Higher Education

Technology

Publishing

University and Colleges

Vocational

90

Corporate Trainingand Other

ProfessionalTraining and

Reference

Corp

ora

te T

rain

ing

23

Num

ber

of

Deals

Total

= 257

U.S. Education Market Investment Activity

Source: BMO Education Market Equity Report September 2008; Stifel Nicolas Post Secondary Education FactBook; Capital IQ Education Industry, pulled September 2008

Where are the Deals?

Over the past four years, over 250 transactions

have occurred in the U.S. education market

THE PARTHENON GROUP

7

$0B

$20B

$40B

$60B

2000

$6B

2001

$7B

2002

$8B

2003

2004

2005

2006

2007

$24B

2008

$28B

2009E

$31B

2010E

$36B

2011E

$39B

2012E

$43B

2013E

$46B

2014E

$49B

2015E

$52B

Revenue($B)

$10B

$13B

$17B

$20B

18% CAGR 12% CAGR 9% CAGR CAGR

(‘00-’15)

16%

7% CAGR

-2%

0%

2%

4%

6%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Ye

ar-

on

-Ye

ar

Gro

wth

Ra

tes

High, but slowing growth… Coupled with clear counter-cyclicality…

-10%

-5%

0%

5%

10%

15%

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

OperatingSurplusAs%OfReceipts

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

TotalMarketSize

Cyclicality is tied to state budget surplus… But masked by a byzantine adoption sales cycle…

Post

Secondary

Enrollments

Basal

Textbook

Sales

Can this growth continue and is it really

counter-cyclical?

In education, many interactive forces cloud trends, making it

difficult to answer growth and cyclicality questions accurately

THE PARTHENON GROUP

8

0%

20%

40%

60%

80%

100%

Healthcare

Illinois School of Health Careers

Prairie State College

Waubonsee Community College

South Suburban College

Corinthian

City Colleges of Chicago

College of DuPage

College of Lake County

Elgin Community College

Other Universities

Robert Morris College

Harper College

Lincoln

Oakton Community College

10,519

OtherVocational

Studies

Prairie State CollegeSouth Suburban College


City

Co

lleges

ofC

hic

ago

Lincoln


OtherUniversities

College of DuPage


4,095

Mechanic

s

College ofDuPage

Harper College

Lincoln

UT

IofIllin

ois

Inc

College of LakeCounty

Elgin CommunityCollege


OtherUniversities


City Colleges ofChicago


3,0

52

Culin

ary

and

Pers

onal

Serv

ices

Capri GarfieldRidge School ofBeauty Culture

City Collegesof Chicago

Piv

otP

oin

tB

eauty

Scho

ol

CannellaSchool of

Hair Design

College of Lake County

Oth

er

Univ

ers

itie

s


2,2

19

Busin

ess

CityColleges of

Chicago

College ofDuPage

College ofLake County

Ro

bert

Mo

rris

Colle

ge

WaubonseeCommunity

College

HarperCollege

South SuburbanCollege


OtherUniversities

Oakton CommunityCollege

BIR Training Center

Zarem Golde ORTTechnical Institute

1,9

71

Socia

lS

cie

nces

Elgin CommunityCollege

South SuburbanCollege

OaktonCommunity

College

City

Co

lleg

es

of

Ch

ica

go

HarperCollege

National-LouisUniversity

OtherUniversities


College of DuPage

1,7

05

Oth

er

Dis

cip

lines

City Collegesof Chicago

National-LouisUniversity

College ofLake County

The Illinois Center forBroadcasting

Zarem GoldeORT

TechnicalInstitute

Robert MorrisCollege

College ofDuPage

BIR TrainingCenter

The John Marshall LawSchool


Oth

er

Un

ivers

itie

s

Harper College

Oakton CommunityCollege

South Suburban College


2,6

06

Pe

rce

nt of

To

tal C

om

ple

tio

ns

Total =26,167

Greater Chicago Area Certificate Degrees, 2007

0%

20%

40%

60%

80%

100%

WASHINGTONDC

1,432

RICHMONDVA

1,421

NORFOLKVIRGINIABEACH

704

RO

AN

OK

E

542

OT

HE

R

596

Total =4,695

Private Special Education Placement, Virginia

Can this growth continue and is it really

counter-cyclical?

Do not forget the ability to gain

share quickly in highly fragmented markets

For Profit

THE PARTHENON GROUP

9

$0B

$10B

$20B

$30B

$40B

$50B

March 2009

IDEA

StateStabilization

Title I

$43.2B

July 2009 -September 2009

IDEA

StateStabilization

Title I

$26.9B

October 2009 -Spring 2010

Other

$9.2B

FederalStimulusFunds

Source: U.S. Department of Education, updated 2/19/09

Timing of Stimulus Package Education Funds Other Category, October 2009 – Spring 2010

● Title I School Improvement Grants ($3B)

● Education Technology State Grants ($650MM)

● Some sources of funding will be awarded

competitively:

− State Incentive Grants ($4.35B) and

Local Innovation Grants ($650M)

− Teacher Incentive Fund ($200M) and

Teacher Quality Enhancement ($100M)

funding

− Statewide Data System funding

($250M)

What impact should I expect from regulatory changes

and stimulus money?

Example – Understanding the K-12 Stimulus Impact

Weekly or monthly, there is a regulatory or funding ‘event’ in education –

staying on top of them and interpreting their impact is a real task

THE PARTHENON GROUP

10Source: U.S. Department of Education, updated 2/19/09

$0B

$100B

$200B

$300B

$400B

$500B

$600B

1970-7

1

1975-7

6

1980-8

1

1985-8

6

1990-9

1

1995-9

6

2000-0

1

2005-0

6

To

tal F

un

din

g (

$B

) Local

State

Federal 7%

8%

7%

('70-'05)

CAGR

10%

4%

6%

('00-'05)

CAGR

$0B

$20B

$40B

$60B

$80B

$100B

Incremental FY2009 andFY2010 Stimulus Funds

October 2009

- Spring 2010

July -

September

2009

March 2009

$79B

Federaleducationspending

7% 5%

K-12 Funding Sources, 1970-2006 Stimulus Spending

7% 6%

8% 4%

7% 10%

CAGR

(‘70-’05)

CAGR

(‘00-’05)

What impact should I expect from regulatory changes

and stimulus money?

Example – Understanding the K-12 Stimulus Impact

Understanding long term political effects is even more critical;

what impact does a doubling of federal monies imply?

THE PARTHENON GROUP

11

0%

20%

40%

60%

0.1 0.2 0.5 1 2 5 10

RevenueRevenue

Relative Market Share (Degrees Awarded)

Estim

ate

d E

BIT

Ma

rgin

(3 y

r A

ve

rage

)

For Profit Education: Online and Ground Program Locally Weighted

Relative Market Share vs. Profitability (3-Year Average Ending 2007*)

10,000 - 20,000

20,001 - 30,000

30,001 - 40,000

>40,001

<10,000

How can I ever justify these multiples?

Scale matters in every one of these businesses – how we

measure it and the degree of impact may differ, but it always matters

Online Students

*Market defined by degree type and discipline; Markets include public, non-profit, and market funded institutions; Public company financial data from 10K’s; private company data from NECS reporting

THE PARTHENON GROUP

12

0%

20%

40%

60%

0.1 0.2 0.5 1 2 5 10

RevenueRevenue

Relative Market Share (Degrees Awarded)

Estim

ate

d E

BIT

Ma

rgin

(3 y

r A

ve

rage

) Building Scale

Driving share gains, likely through

acquisition, generates predictable

margin gains

Operational Improvements

Operational improvements are

required to achieve expected levels

of profitability given scale


Optimizing the current business and building scale

are critical in every education business that we have seen

THE PARTHENON GROUP

13

Fight the slowing market

growth by supporting and

filling the core…

…Focus on operational

profitability by driving

incremental utilization…

…Build out scale positions

and consolidate…

● The market is large and will

continue to grow at a strong

pace; but, that pace is

decelerating

● All students are not equal; some

are more profitable than others

● The current marketplace is too

fragmented for long-term

success and there is significant

opportunity for further

consolidation

● Marketing Effectiveness

● Student Experience

● Pricing

● Retention

● Utilization

● In-Fill Territories

● Phase II Consolidation

…Expand from core

strength into nearby

adjacencies

● Core areas of strength can be

leveraged profitably into close

adjacencies of delivery method

and degree types

● New Degrees (Associate,

Master)

● New Verticals

● Online Expansion

Optimize Core Programs

A Classic Post Secondary ‘Play Book’


You will need a clear post acquisition plan and, in education, you will

typically need to supplement the current team and be an activist investor

Expand Into Adjacencies and Build Scale

THE PARTHENON GROUP

14

● Deals are everywhere.

However, be very aware

that each sector

represents fundamentally

different core business

models and value drivers

(e.g., distributed retail,

direct marketing, sales

force management)

Where are

the deals?

Can this growth

continue and is it really

counter-cyclical?

What impact should I

expect from regulatory

changes and stimulus

money?

How can I ever justify

these multiples?

● Different sectors have

different dynamics, most of

which are not straightforward

● Be prepared for weekly or

monthly ‘events,’ yet retain

the long-term perspective

that ‘this has happened

before and we kept on

growing’

● Historically, leverage…

● In most instances you are

buying long-term growth

with low volatility – be very

sure about the sector, the

business model, your target

company’s position, and

your post acquisition plans

There are always issues to resolve, but

education represents one of the most compelling

sectors for investment

You Ask Us …

Our Perspective…

THE PARTHENON GROUP

15

0K

10K

20K

30K

40K

2004

2.0K

2008

PurelyOnline

10.5K

Enrollment

50.9%

('04-'08)

CAGR

0K

10K

20K

30K

40K

2005

6.2K

2008

PurelyOnline

22.0KEnrollment

52.4%

('05-'08)

CAGR

0K

10K

20K

30K

40K

2005

3.1K

2008

PurelyOnline

16.0K

Enrollment

73.2%

('05-'08)

CAGR

# of programs 47

% of Total

Enrollment 4.8% 17.5%

Purely Online

But let us not forget the explosive growth you can

experience in this market place!

Source: EDMC 10-K; Grand Canyon S-1; Analyst Reports; Conference Calls; BMO Capital Report

Education Management Corporation Grand Canyon University

• 12.9K students over

3 years

• Growth driven by

introduction of new

programs and

investment in boosting

enrollment

• 15.8K students over

3 years


online capabilities

combined with the

brand name of the

university

Corinthian College

• 8.5K students over 4

years


advertising and new

programs

“Getting to 10,000 starts in a five year time-frame is pretty much the industry standard. Grand

Canyon, Corinthian, Westwood College and Virginia College all did something similar.”

# of programs 67

% of Total

Enrollment 73.8% N/A

Purely Online

# of programs 16

% of Total

Enrollment 3.4% 15.2%

Purely Online

THE PARTHENON GROUP

16

About The Parthenon Group

The Parthenon Group is a leading advisory firm focused on strategy consulting with offices in Boston, London, Mumbai,

and San Francisco. Since its inception in 1991, the firm has embraced a unique approach to strategic advisory services;

long-term client relationships, a willingness to share risk with our clients, an entrepreneurial spirit, and customized insights

are the hallmarks for which The Parthenon Group has become recognized in the industry. This unique approach has

established the firm as the strategic advisor of choice for CEOs and business leaders of Global 1000 corporations, high-

potential growth companies, private equity firms, educational institutions, and healthcare organizations.

Advisory Services for Investing in Education

The Parthenon Group advises clients in all stages of investing in education companies, including target identification and

screening, strategic due diligence, portfolio company strategy and operational improvement, and sell-side support. The

combination of Parthenon’s Private Equity Practice, which has advised clients on over 1000 transactions, and our

Education Center of Excellence, which has worked across all aspects of for-profit, public sector and non-profit education,

make Parthenon the preeminent advisor to private equity firms considering investments in the education industry.

For further information, please contact:

Robert S. Lytle Jay Bartlett

Partner, The Parthenon Group Partner, The Parthenon Group

Education Center of Excellence Private Equity Practice Group

(617) 478 7096 (617) 478 4612

[email protected] [email protected]

Assistant: Deborah Spitzley Assistant: Heather Manning

(617) 478 6312 (617) 478 4623

[email protected] [email protected]

About The Parthenon Group and our advisory services

for investing in education

mailto:[email protected]






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