Why is PE seizing the university challenge?

This week’s blog comes from Anna Grotberg, a Director in EY-Parthenon’s Global Education Practice.

We are at a unique point in the history of higher education. Globally, the number of students looking to study and able to pay for higher education is as high as it’s ever been – and is set to move even higher. UK universities would seem to be well placed to benefit from this trend; but they also face a unique set of domestic circumstances that will challenge them to take some tough decisions.

This blog will examine those challenges and the possible solutions, some of which are opening up opportunities for new types of investment in this market – including private equity. Indeed, the higher education sector has exceptionally attractive characteristics for PE, as we’ll discuss.

A unique growth opportunity

In the last fifteen years, global higher educational (HE) enrolments have risen 5% per annum, with much of the impetus coming from emerging markets. Rising per capita GDP has historically had a strong link with tertiary education growth, as has the growth in the middle classes. The demand is such that UNESCO estimates that four additional universities are required each week for at least a decade – below the current level of supply.

GER vs per Capita GDP1

Governments are responding to the supply-demand imbalance through a mixture of greater funding, use of loan systems and liberalisation. The private sector is gaining market share across Europe as European governments are unable to fund the system to maintain quality and capacity. The shortage of places in emerging markets is encouraging students to look overseas, where they are also attracted by the perception of better quality education in more established markets and the opportunity to study in English.

private vs public enrollment europe1

All of which puts us at a unique moment in the growth in HE, with the potential for exceptional growth in global student numbers over the next 20-30 years.

The UK challenge

UK universities would seem well placed to from these trends, given the obvious language advantage in addition to the presence of well-established institutions. So, why have we seen so many negative headlines? Most UK universities are currently financially stable, but all face a difficult set of domestic challenges which will impact future financial sustainability.

A report by the All Party Parliamentary Group (APPG) for International Students noted last month that whilst the UK is the second most popular destination for international study, its global market share in tertiary education has been in decline since 2011. This is in part due to increased efforts from its main competitors (USA, Australia and Canada) to attract students, but also changes to student visa and post-study regimes. Brexit adds further uncertainty for students in terms of access and fees, which may revert to higher international levels for EU students.

“A significant risk to the sector is the impact a decline in overseas students would have on associated fee income and the longer-term financial sustainability of HEIs at their current level of activity.”

Financial health of the higher education sector, Higher Education Funding Council for England (HEFCE), April 2018

UK universities also face increasing competition at home. According to the ONS, there will be an 8% (around 200,000) decrease in 18 to 20-year olds between 2016 and 2021, with the number of young people in this age bracket not expected to recover to 2016 levels until 2025. But, beyond this demographic challenge is the absolute sea-change in how students view university education since the introduction of tuition fees.

The rise in surveys looking at employment outcomes after university is just one indication of the increasing focus on return on investment. The increasing popularity of apprenticeships and alternative providers, focusing on vocational qualifications with a clearer route to employment is another. Students care more about their post-university outcomes and want a clear path to successful employment based on the qualification and institution they choose.

Universities have increased investment into their estates and facilities to compete; but this has involved increasing debts (up threefold in the last decade), whilst costs are increasing and income is challenged. Tuition fees are frozen for 2018-19, government grants are falling and research income is tougher to secure – perhaps even more so after Brexit.

Repositioning opens new opportunities

These changing market dynamics are forcing universities to redefine their position in the market. They’re increasingly thinking about the balance between research, teaching and investing in the growth of ‘alternatives’, such as developing apprenticeships courses with employers and online courses to reach new segments of students.  It is becoming increasingly difficult for universities to cover all of these bases, retain their position in the relevant rankings and remain financially stable. Universities will need to assess their strengths and opportunities and differentially invest to grow.

This is where opportunities also open up for investors to play into these themes. It is a challenge for private equity to buy universities in the UK due to the low number of private for-profit providers, but they can invest into services and products that help universities deliver and compete in this new world.  Universities will need funding and commercial partnerships – and this is where PE can step in. There are opportunities for PE to invest in commercial ventures with universities; in new teaching areas, such as massive open online (MOOCs) or pathway providers to recruit international students; or in the delivery of apprenticeships and partnerships with employers. Indeed there have been a number of private equity deals in the past 12-18 months focused on online course and apprenticeship providers.

There are also opportunities in private HE, where providers tend to differentiate by providing courses with a clearer vocational ROI proposition. Private models allow greater flexibility and speed in the market to adapt to new employment trends and delivery models.  The private share of the UK HE market is small – 3% – but enrolments are growing at 15% per annum.

growth in public & private PE1

Why is PE and HE such a good match?

Why might private equity be interested in investing into HE? The key features of HE are those which typically attract PE investors.

  • Growth: As outlined above and especially for institutions teaching in English.
  • Revenue visibility:  A bachelor’s degree is 3-4 years on average and a Master’s degree 1-2 years.
  • Inflation-proofing: HE fees typically grow at a premium to inflation.
  • Negative working capital: Fees are received upfront, whilst most costs (e.g. wages) are incurred throughout the year.
  • High barriers to entry: Official accreditations are difficult to obtain and reputations hard to build. Models offering face-to-face teaching also require considerable capex to establish.
  • Opportunity for consolidation: Private HE markets are typically fragmented thereby presenting attractive opportunities for market consolidation via acquisition.


There are echoes here with our recent blog, which looked at private equity’s increasing interest in the health-care sector. In a more uncertain world, above-inflation growth and stable revenue streams are becoming harder and harder to find.

No sector is entirely recession proof, but HE has exceptionally strong growth potential making it an exceptional opportunity for investors in the current climate.