• December 20, 2014

Investor Groups May Be Nonprofit Colleges' Next Saviors

Nonprofit colleges in financial trouble have options other than merging, shutting down, or, as was the case for institutions like the College of Santa Fe and Daniel Webster, Kendall, and Waldorf Colleges, selling themselves to for-profit higher-education companies.

With so many private investors now looking to get a piece of the higher-education action—and especially, to get in on the boom in distance education— institutions, whether ailing or not, have growing opportunities to form joint ventures with private investors.

The joint ventures allow them to preserve their academic essence while also generating new revenue.

"Folks have figured out there's a lot of money to be made," said Michael B. Goldstein, a lawyer who worked on one such arrangement recently involving the newly formed College for Working Families, a joint venture backed by the National Labor College and Penn Foster Education Group.

"It's a classic example of self-help," he said on Tuesday, during a session of the National Association of Independent Colleges and Universities meeting here.

A Strategy to Share Profits

The joint venture that helps to run the all-online Ivy Bridge College of Tiffin University, established with an infusion of capital from a three-year-old, investor-backed company called Altius Education Inc. of San Francisco, is another example.

"Everything academic is run by Tiffin University," says Cam Cruickshank, vice president for enrollment management. Tiffin, in Ohio, could have started the two-year institution without the joint venture, he says. "But we would have had to do it on a shoestring budget." Ivy Bridge enrolled its first 32 students in August 2008; today, enrollment tops 540.

Tiffin officials project that the Ivy Bridge College LLC joint venture, which handles marketing, administration, and student recruiting, could begin generating profits for Tiffin and Altius by the next fiscal year.

Altius is now in discussions with other nonprofit colleges about forming similar arrangements.

At its basic level, the joint-venture idea is a variation on the outsourcing that many institutions already engage in with companies for 'noncore" services such as facilities management and marketing, and for the curricula and electronic platforms they use to deliver distance-education course materials.

The difference? Instead of paying an outside third party to provide such services and letting it keep the profit it makes, the college and a financial partner establish a joint venture and pay market-rate fees to that entity for providing the services.

"Instead of all the profit being retained by the third party," says Mr. Goldstein, it goes to the joint venture, and then is shared between the college and its partner.

In the case of the College for Working Families, Mr. Goldstein says 51 percent of the profits will go back to the National Labor College, which was founded by the AFL-CIO. Penn Foster, a company that runs for-profit colleges and was recently bought by Princeton Review, will get the rest.

Over time, if a joint venture appreciates in value, the college and the investors have the opportunity to sell off a piece of it to raise additional capital for themselves.

Weighing Opportunities

Mr. Goldstein has now begun promoting the joint-venture model on the college-conference circuit.

At the National Association of Independent Colleges and Universities meeting, an early-morning session where he discussed the idea was sparsely attended, but when he gave the pitch last month in Florida during a meeting of the Council of Independent Colleges, many of whose members are small and tuition dependent, the room was packed.

Mr. Goldstein said joint ventures aren't only for colleges that find themselves in difficult financial straits. Such partnerships are also a way for strong colleges to build their balance sheets and find capital to expand. That's because private investors continue to seek ways to enter the higher-education market. Several investor groups joined the bidding for the right to establish the College for Working Families, he noted, and Penn Foster's bid was twice the size of the required minimum bid.

For the right college with the right brand and market niche, "investors will come forward," said Mr. Goldstein, "This is not philanthropy."

Andrew Sund, president of St. Augustine College, in Chicago, said he could attest to the investor interest. "I've been approached by people with money," said Mr. Sund., who heard Mr. Goldstein's talk in Florida and came to hear what more he had to say in Washington on Tuesday. St. Augustine is looking to expand with distance education and Mr. Sund wants to learn more about the model to see if it is right for the college. "It could be the way for our institution to do online," he said.

Comments

1. intered - February 03, 2010 at 12:38 pm

The 51%, divided responsibility, capital infusion model suggested by Goldstein may be the best choice in some contexts but it is by no means the only approach that we recommend struggling institutions consider.

Least visible among the downsides of this approach, is the fact that holding 51% may not translate into de facto control as was suggested above.

Colleges, especially struggling colleges but effectively all of them, do not possess the metrics (precision or otherwise) to manage their portion of the new enterprise. They are used to managing the institution via compromises among large ideas, and top line revenue and expense values.

The capital infusion partners possess or create extensive precision metrics to manage their portion of the enterprise. Additionally, they are represented by disciplined individuals who are persistently effective in achieving their agendas through careful analysis and constructive argument.

Whether the ownership ratio is 51/49 or 75/25 favoring the original institution, the capital infusion partner controls financially strategic elements of the agenda, at the outset, and gradually controls other important elements of the enterprise when those elements are, or are perceived to be, in the interest of maximizing shareholder value.

Yes, 51% represents effective legal control but the original institution soon realizes that the only way this kind of control can be guaranteed is in an adversarial environment, which is not in the interest of either party.

There are other reasons to consider all options for capital infusion and restructuring to become financially successful. Some options retain de facto control; some do not. Virtually all options change culture.

Robert W Tucker
President
InterEd, Inc.
www.InterEd.com

2. sullivab - February 03, 2010 at 04:39 pm

This can look so tempting at the outset: grow your institution with other peoples' money! What's not to like? Alas, the Golden Rule applies: he that has the gold makes the rules. College administrators entering into such a joint venture are likely to wake up one day to find themselves completely marginalized or out of a job. Our Lady of the Poor College is transformed into OLPC Inc.: the bricks and mortar campus vanishes (with the proceeds going to the equity partners); tenured faculty are replaced by contracted adjuncts; and classroom discussions yield to chatrooms and blogs. On the plus side, more individuals are trained (whether or not they are actually educated according to the hoary tenets of Our Lady of the Poor is another matter) & the enterprise grows in value. Again, what's not to like?

3. michaelclifford - February 03, 2010 at 05:24 pm

As usual, great reporting,Goldie!

This area I predict will explode in the next few years as my phone is ringing off the hook with regulators and schools calling to explore Private-Public Partnerships.

We bring Money, Marketing and Management to these schools.

Keep up the good work!

Add Your Comment

Commenting is closed.

subscribe today

Get the insight you need for success in academe.