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BMO Back to School 2013

Each year, Jeff Silber of BMO Capital Markets hosts their Back to School education investment conference.

There are a lot of challenges in education, from new regulations, roadblocks to federal funding, a sea change in technology, and changing buying patterns. This year, ABA was pleased to be included into the program’s K12 segment, with Farimah moderating a panel on the role of the teacher in the education economy. Read more below.

Also, for anyone going to Ednet next week in Denver, let us know if you want to meet. We are proud to be a sponsor of the conference.

Legislative and Regulatory Update

Nina Rees, National Alliance for Public Charter Schools

Look for continued cutbacks in federal education money, with nothing much on the horizon except a continuation of sequestration cutbacks.

The Elementary and Secondary Education Act (ESEA) governs
federal funding and regulations for K12 schools, and is supposed to be reauthorized every 5 years. The most recent reauthorization was the No Child Left Behind Act of 2001.

English: President Lyndon B. Johnson signing the Elementary and Secondary Education Act

English: President Lyndon B. Johnson signing the Elementary and Secondary Education Act (Photo credit: Wikipedia)

While nearly everyone in Washington sees major flaws in the 2001 act, there will be no ESEA reauthorization or K12 legislation in the foreseeable future. This means that there is more action taking place at the state level, and that private foundations are having a big influence on state departments of education by lobbying and funding pet projects.

Funding penalties to all states and nearly all districts for not meeting the NCLB prescriptions (legislated in 2001 and never adjusted) has given the Department of Education the opportunity to negotiate policy changes with states in return for “forgiving” non-compliance. These negotiations generally cover a two-year period, result in policies that vary state by state, and have to be renegotiated every two years.

There is some pressure to change the definition of failing schools. Currently schools fail when their students to not pass grade-level tests. An alternative is that a school would fail if its students progressed at less than one year’s worth knowledge gain. If a student starts out as two years behind, there is little in the short term the school can do to bring that student up to grade level, and so the school and teacher would be labeled as failures. The change would be to recognize that perhaps the school could at least help that student from falling further behind, or start to catch up, and that that would be progress. So far, there is no change to the original definition being posited by the Department of Education, and there is little hope of any progress with the definition being changed through ESEA reauthorization in the near future, but it’s a meme and idea worth following, and it would have broad ramifications if it is ever enacted.

There are now 6,000 charter schools with 2 million students, and 1 million families on charter wait lists. Growth is strong, with over 400 new charter schools in the last year. There are more public charter organizations, but for-profit charters are serving the largest numbers of students. Growth of charter schools has been constrained by state caps on the numbers of schools and numbers of students who can attend, and loosening those caps is a major focus of charter school and private foundation lobbying efforts.

Construction project to repair and update the building facade at the Department of Education headquarters in 2002 resulted in the installation of structures at all of the entrances to protect employees and visitors from falling debris. ED redesigned these protective structures to promote the "No Child Left Behind Act". The structures were temporary and were removed in 2008. Source: U.S. Department of Education

Construction project to repair and update the building facade at the Department of Education headquarters in 2002 resulted in the installation of structures at all of the entrances to protect employees and visitors from falling debris. ED redesigned these protective structures to promote the “No Child Left Behind Act”. The structures were temporary and were removed in 2008. Source: U.S. Department of Education (Photo credit: Wikipedia)

Finally, there is the possibility that the FCC will be able to pass some additional funding to schools via E-Rate, which is used to pay for connectivity. Because E-Rate is funded through the Universal Service Administration fees paid by telecom companies (not officially a tax) it may not need Congressional approval.

Comments on the current proposed changes to E-Rate are being accepted now.

Sally Stroup, Association of Private Sector Colleges and Universities

In higher education, the action is at the federal level. Since such a large percentage of students are getting federally guaranteed student loans, and the Department of Ed determines which colleges can accept student loans as payment, it is using this leverage to define new policies on admissions, graduation rates, and programs of study which affect the ability of students to get jobs which allow them to pay back the loans. These rules are being especially applied to for-profit schools, but it’s possible that they will be expanded to all schools. The rules are being negotiated over the next 12 months.

While many view it as beneficial that the Department of Education prod higher education improvements, opponents point out that a) it’s not the government’s job to control college costs, that is the job of the market, and b) the accrediting agencies should control education quality, not the Department of Ed.

Still, when you that fewer than half of community college or for-profit students graduate, and that many graduates then find it difficult to get decent jobs, it’s pretty clear that something is broken.

Empowering K12 Teachers

Farimah Schuerman, Academic Business Advisors
Ketan Kothari, Edmodo
Andy Myers, Renaissance Learning
Jeanette Haren, Truenorthlogic

Better data leads to better decision making, better instruction, and more effective use of student learning time. But having the data is useless unless it is used by the teachers.

Edmodo portrayed that the best way to penetrate education is through the teachers, and that it’s important to have one central platform that collects and reports on the data. Edmodo is focused on user growth, not
revenues.

Renaissance Learning argued that the important content and data decisions were made at the district level, and that as long as the information is available and useful, no one platform is going to win.
Truenorthlogic agreed that the administrative buying decisions are made at the district level, that you need to both get teacher buy-in and that you need to provide a path for teachers to improve their skills, both to assure teacher buy-in and to comply with professional regulatory requirements.

Talking to Public, Private, and Venture Investors

Jeff Silber, BMO Capital Markets
Michael Moe, GSV Asset Management
Lisa Rapuano, Lane Five Capital Management
Peter Wilde, Providence Equity Partners
Chris Howhn-Saric, Sterling Partners

At last year’s conference, education investors were flocking out of the US market, and into international markets. The US was seen as over-regulated, saturated, and not growing. This year, there has been a resurgence of education
investment activity in the US.

Some of the activity has been a result of shifting from other US sectors. The US economy in general is seen as zero growth, but it’s also the largest capital market. The education sector is large, it’s fragmented with many small players with an opportunity for scaling, and there are a convergence of catalysts (common core, technology, big data, assessment, and others) pointing to a huge opportunity.

Some of the activity has shifted from global markets back to the US, which is, after all, by far the largest education market in the world.

There are segments of the US education market that are (in terms of revenue or money spent) larger than the entire education market in India right now. Plus, economic instability in other parts of the world may be encouraging funds flow back to the US.

And some of the activity is because, in global opportunities, the locus of corporate headquarters is not that important. For example, Coursera may be a US company, but 60% of the students come from
outside the US.

Overall, the panelists agreed that returns in education are not going to be good for investors. Although there are going to be some phenomenal winners, predicting them is going to be like the automobile industry at the turn of the last century. In the 1910’s there were about 2,000 US car companies; only three of them remain. Those three saw outsized returns, but virtually all of the others gave back pennies on the dollar.

A great question came from the audience, “Can you give an example of an education investment you made that didn’t pan out the way you expected, and what you learned?”

The most honest answer: “All of them.”

Conclusions

Both the K12 and Higher Education sectors are undergoing rapid change. Buying and usage patterns are being transformed by technology and regulations. For anyone looking to expand in or acquire firms in the education space, this might be a great time to seek advice from experts such as Academic Business Advisors.

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