We have all heard the terrible statistics about the state of education in America: that we rank 24th out of 29 OECD nations surveyed, that we are tied with Latvia in our science ability. Here's a new one: Only 31% of college graduates are able to read a complex book and extrapolate from it. That's people actually graduating from college! Can it get any worse?
Wouldn't it be great to find a way in which to bolster education and make a lot of money at the same time? That's what the founders of Quad Partners aim to do, and by the looks of it, they are well on their way.
In 2000, Lincoln Frank, formerly of J.P. Morgan and Goldman Sachs, Thomas Kean, a graduate of Teachers College and a former governor of New Jersey who is president of Drew University, and Stephen Spahn, headmaster of the Dwight School in New York and founder of the International School of London, teamed up to invest private equity funds in education companies.
Joining them were Daniel Neuwirth, who had worked in the education area of Donaldson, Lufkin & Jenrette's investment banking group, and Andrew Kaplan, who had previously been at the textbook publisher Scholastic. The group had plenty of credentials in private equity and education; they also had terrible timing.
The private equity industry did a nosedive as the group was getting started, so it took longer than expected to raise their first $100 million fund, which closed in August 2002. Currently, the group has invested 85% of its initial fund, but few deals were struck before 2003. The group is just beginning to realize returns from their investments. Nonetheless, the results so far are promising enough to warrant a second fund, of $200 million, which is being launched.
Since its start, the group has investigated thousands of small education enterprises, honed their business model, and reached some conclusions about how to provide investors with compelling returns while also making a difference. Make no mistake - this is not a philanthropic undertaking. Though the principals are unanimous in their commitment to bettering education, the ambitions of Quad are to maximize investor returns. These two interests, in Mr. Frank's view, are not incompatible. "The only way to make money in this arena is to drive the educational outcomes," and that's what they intend to do.
To that end, the outfit focuses on taking controlling positions in small companies with proven track records and positive cash flow. Typically the target firms are producing revenues between $5 million and $75 million. In this category, they are flying beneath the Wall Street radar. As Mr. Frank says, "The choice is usually between doing a deal with us or no deal," as they work with, typically, founding entrepreneurs who need help taking their ventures to the next level.
Quad employs limited leverage and relies on its network of contacts and the acumen of its partners to help companies realize their growth potential. The exit strategy? They will likely sell to strategic buyers.
What's the opportunity for a firm like Quad? Spending on education industry in America tops $1 trillion a year, representing 9% of the GDP, and grows at twice the level of inflation. As school districts and private institutions strive to improve the product, new technologies and approaches are being introduced daily, many by just the kind of entrepreneurs attractive to Quad.
Ultimately, though, some of the best approaches are also among the oldest. While online learning aids for high school students or new educational toys for the pre-K set abound, Quad has found that one of the most worthwhile investments in a young person's future can be from post-secondary trade or professional schools. Attending some of these institutions, according to Mr. Frank, can mean the "difference between a person's opportunities in life being a minimum wage job or a career."
Though some of these institutions have gotten bad press in recent years for promising more than they can deliver and for misrepresenting results to take advantage of government financing programs, many career schools have been around a long time and are effective in training students for jobs.
Historically, these schools have competed with community colleges in attracting high school graduates looking for job training. According to Mr. Frank, some community colleges have lost ground to the for-profit schools. A case in point is the experience of the Dorsey Schools of Business, a 70-year-old group in the Detroit area recently acquired by Quad. While the local community colleges graduate only a small percentage of those who enroll and an even smaller number of minority students, the Dorsey Schools routinely enjoy high retention rates and good job placements for graduates.
Quad bought the Dorsey schools just a few months ago. It was a typical acquisition, in that the company's reputation was intact, the product was good, but the business side of the group had weakened. The Quad group has already engineered a 25% gain in enrollment.
Along the same lines, one of the team's most successful investments has been its purchase of the Marinello Schools of Beauty. These outfits, mostly located near Los Angeles, have been around since 1903. The schools had been owned by a large diversified company, which had let the operation slide, making it a perfect candidate for the Quad group. "There was a ton of latent growth potential," Mr. Frank says. "There were almost no admissions officers, the schools were operating at about 25% of capacity, and there was no marketing. The schools were located in one area, which meant we could leverage our marketing dollars."
Quad bought the beauty schools in March 2004. Since then revenues and cash flow have tripled. Presumably the value of the company has kept pace.
On the other side of the ledger, the worst investment made by the Quad group was its purchase of Troll Communications, which published books for pre-K through ninth grade distributed through school book clubs. Quad bought the company in 2002, then got slammed by a poor Christmas selling season. Though the brand had been around for 45 years, the company had more severe management issues than could be addressed by Quad. Ultimately they sold the business to Scholastic for a loss.
Going forward, the group expects to provide excellent returns to investors while at the same time promoting educational opportunities to young people. "We care very much about outcomes," Mr. Frank says. "We do not cut corners. We're in business to give kids careers."