Plunder, Private Equity, and Education

Brendan Ballou served as Special Counsel for Private Equity at the U.S. Department of Justice, which qualifies him to wrote Plunder: Private Equity's Plan to Pillage America. It's one of those books that you read to learn about things you were probably happier not knowing. And while it doesn't directly address education, when we put it together with a report on private equity in education, the writing on the wall is pretty huge.

Plunder is divided into three sections-- How They Make Their Money, How They Get Their Way, and How To Stop Them. Early on, Ballou explains how the private equity firm business model so often leads to disaster (for everyone else):

First, private equity firms typically buy businesses only for the short term. Second, they often load up the companies they buy with debt and extract onerous fees. And third, they insulate themselves from the consequences, both legal and financial, of their actions.

Ballou goes on to lay out some of the techniques used by private equity to squeeze money out of businesses. Leasebacks--make the business lease its own stuff, which also creates a insulating layer between the business and the true owner. Dividend recaps--basically borrowing money on the business's credit in order to give that money to the private equity company. Strategic bankruptcies. Forced partnerships--requiring the businesses you own to combine, perhaps by merger, or perhaps by making Company A get all its goods from Company B. Tax avoidance. Rollups--basically a monopoly style of taking control of a market. Layoffs. Price hikes. Quality cuts. Operational efficiencies.

Folks in education will recognize what he says about operational efficiencies, which "belie a certain arrogance in the private equity industry, the idea that in three to seven years, well-educated dilletantes can run a company better than those who've often spent a lifetime doing so." Yup. That sounds familiar.

The book devotes single chapters to the private equity takeovers of housing, retail, nursing homes, health care, and prisons. Ballou also gets into some very specific tactics, like suing the customers, a tactic used against "tens of thousands" of student loan borrowers.

Ballou looks at private equity takeovers in the public sector (check out The Privatization of Everything for even more details), with some attention to private equity in for-profit colleges. He brings up the example of Ashford University. Once private equity bought it, they went from 332 students to 83,000 mostly online students. But the university was allegedly "little more than a scheme to extract money from its students." When Senatore Tom Harkins looked into it, he found that the school had over 1,700 recruiters, and just one employee devoted to helping grads find jobs. And as we've seen in many cases, "the government subsidized the for-profit college, but did little to constrain its predation."

And that alone would seem like a clear indicator of the danger of voucherized private schools if private equity gets its hands on the K-12 sector. Private equity at its very worst is not simply interested in getting profits from its business--any business wants to extract enough money to pay its workers and leaders and insure its own survival into the future. But as this book shows repeatedly, private equity is not interested in the business's survival into the future, but simply looks to squeeze every penny out, right now, and if that nobbles or kills the business, oh well. Ka-ching, baby.

And you may think, "Well, let's be sure not to head down that road." And if that's your thought, I have bad news. 

The Private Equity Stakeholder Project works to track and engage the stakeholders and investors affected by various private equity shenanigans, and they have a whole report entitled Private Equity in Education that lays out some of the private equity holdings, and shows the ways that "Wall Street profits from a public good."

The big picture is striking enough. Private equity deals have been rocketing up for the past few years. In 2021, there were almost 150 deals involving $14M in capital. That's driven in part by the post-pandemic belief that "EdTech is a new and permanent asset class" aka sector that be sucked dry.

Private equity firms and the companies they own have promised to improve educational outcomes for struggling individual students and schools through new technology, personalized learning strategies, and resources for staffing and administration, but there is no conclusive data showing that school funding is better spent at private-equity owned companies than staying within the district.

The report at looks some specific areas where private equity has laid down its marker.

Curriculum development and test administration. 

The private equity technique of forcing its holdings to marry each other really figures in here. If you own the company that decides what gets taught and the company that determines how the outcomes are measured, then you can cash in big time. And it adds a whole other layer to what is already a big business octopus.

Take the Cambium group, which includes all sorts of  edu-bizes, like the Learning A-Z folks, Rosetta Stone, American Institute for Research (the SBA test folks), and a boatload of other companies both the curriculum and testing biz. Or HBH, aka Houghton Mifflin Harcourt, a giant octopus that used to be strictly in the text publishing business. They've also expanded through acquisition, including their recent acquisition of NWEA (the MAP test folks). In both cases, when you take their test, what do you suppose it recommends for remediation. And if you want to be pro-active and do well on the test, whose materials do you think are your best bet.

But that's not the end of it.

Both Cambium and HBH are owned by Veritas Capital, a big private equity firm. Renaissance Learning, McGraw Hill, Imagine Learning (including Edgenuity), Edmentum, Discovery Education, Carnegie Learning-- all owned by private equity companies. 

Not only do these companies produce curriculum and tests, but they also support big time lobbying (see a cool chart here). Which, as Ballou points out, is a big private equity tool--lobbying to make sure the rules favor you every step of the way.

That means a huge chunk of the industries that support education is in the hands of folks who can be expected to put their main attention on how to squeeeeeze these businesses for every dollar, and if that means lower quality and cutting corners, oh well. Ka-ching.

Outsourced staffing

For some outfits, the teacher exodus is not a crisis or a problem, but an opportunity. The report says that education staffing companies generated $1.2 billion in revenue in 2021. If you want to see how the private equity lens affects the view of this crisis, consider a Forbes column by Evan Erdberg, head of Proximity Learning Inc (previously acquired by Education Solutions Services, result of a merger with Source4Teachers, all under the control of private equity firm Nautic Partners). 

Erdberg acknowledged that this shortage is in large part due to teachers being undervalued, and noted that even though the average teacher salary recently reached $66,000 nationwide, this is not enough: “We cannot expect these highly educated, trained and experienced individuals to continue to work above and beyond their pay scale while never recouping the costs.” Erdberg offers PLI as a solution, but the company does not solve issues related to teacher pay. As of October 2022, PLI advertised pay for part-time virtual teachers between 20 to 30 dollars per hour, which comes out to less than the national average Erdberg cited in his Forbes piece.

Access to student data

Private equity is looking for ways to get value out of assets, and has been said repeatedly, data is the new oil. 

Vista Equity Partners owns at least 27 companies that provide them with a mountain of student data. Writes The Markup in an article entitled "This Private Equity Firm Is Amassing Companies That Collect Data on America's Children."

We found that the companies, collectively, gather everything from basic demographic information—entered automatically when a student enrolls in school—to data about students’ citizenship status, religious affiliation, school disciplinary records, medical diagnoses, what speed they read and type at, the full text of answers they give on tests, the pictures they draw for assignments, whether they live in a two-parent household, whether they’ve used drugs, been the victim of a crime, or expressed interest in LGBTQ+ groups, among hundreds of other data points.

No single one of Vista's companies holds every one of those data points, but Vista itself owns all of it. That includes the popular PowerSchool, SRB, Intersect, Naviance, Schoology, and Kickboard, plus others.

The report also looks at how these companies work to weaken regulations, such as student privacy regulations. 

And, of course, the sweeping up of actual education providers. In addition to the for-profit colleges that Ballou discusses, private equity has also been buying up early childhood education. KinderCare, O2B Kids, Littel Newtons, Northstar Preschools, Small Miracles--the list of private equity owned providers goes on. Many are part of the Early Care and Education Consortium (partnered with the Boston Consulting Group, another red flag), a group that lobbies hard against any public service model for pre-K. 

Charters are also ripe for the private equity crowd. The report outlines how Ron Packard, then CEO of K-12 (now Stride) the 800 pound gorilla of for-profit charters, spun off Pansophic Learning (supported with money from Dubai private equity form Safanad) which in turn gave us the ACCEL charter chain, an outfit that has really refined the many ways that a charter school can be gamed to make money using techniques that Ballou outlines in private equity handling of nursing homes and prisons. Make the business lease back its own stuff. Make money from real estate investing. In fact, Safanad also makes money in the nursing home biz, and Jeff Bryant and Yves Smith found strong parallels between how ACCEL squeezes money out of its charters and Safanad squeezes money out of nursing homes. Ka-ching.

In 2022, Carol Burris looked at how ACCEL gamed an Ohio charter school so thoroughly that even if the school failed, ACCEL would still make money. Because sometimes if you want the money out of the piggy bank, you just have to take a hammer to it.

That, as Ballou shows in his book, is the private equity game at its worst-- a dead-eyed focus on pulling money out of business so narrow that the success or failure of the business itself is irrelevant. As Ballou shows, that has catastrophic effects when applied to public utilities and prisons and nursing homes, and we can expect equally terrible effects in education. Certainly, children do not deserve to become collateral damage because some private equity dude feels he's not quite rich enough yet. 

Private equity should be kept far away from education (and all other sectors involving live human citizens). Schools are too important to be a target for plunderers, too vital to be treated as some private equity investor's piggy bank. You may want to check the Private Equity Stakeholder Project report, just to see if some private equity properties are latched onto your local school. It can help explain why it may seem as if some education business doesn't seem to be even trying to do its actual job--it's because private equity thinks a company's only real job is to generate that lovely sound that drowns out all the noises of complaint. Ka-ching.