The following is an abbreviated and highly edited version of a fascinating interview with Trace Urdan. For over 16 years, Trace has followed the investible education sector from early childhood through corporate learning on behalf of private and public market investors, most recently as Equity Research Analyst at Credit Suisse.
The interview is about 40 minutes, and well worth listening to. Click the link below to play.
It seems that for at least 10 years, you've been possibly the premier financial analyst on education. What attracted you to become a financial analyst of the education sector?
I started in publishing, and decided to take a shot at being a financial analyst. The education sector is fascinating, it’s a mixture of finance, policy, research, politics, variety of different business models, and the unique aspect of selling into the government and school systems. I believed strongly that there is a role for private capital in the education system. And I welcomed the opportunity to be a voice representing investors in the industry.
In other markets, companies of under $500 Million are really small, below what they call microcap. What is the education market like?
It used to be that micro-cap was $50M in market value. But companies are postponing going public until they are much larger. You may have seen that EverFi just raised $190M in private financing. Ten years ago, they might have gone public. You don’t have as many early stage companies playing themselves out in the public market, especially in education, as you used to. Another part is that it’s really really hard to scale a business in education; it’s a difficult sector (for more in this area, listen to the audio).
What makes you believe that we will have better outcomes for kids by having a collaboration between private money-making organizations and public and nonprofit institutions?
There is no question that education is a public good and a public responsibility. We haven’t seen any indication that governments have been very good at investing and innovating in education. That’s something that private capital has been very good at, which the public sector can then adapt. I’m going to be provocative and say that anything that has been ground breaking and innovative in education, K12 and higher ed, has been capitalized and driven by private businesses. The kinks get worked out and then you see it migrating to the public sector and accruing to the benefit of everyone. (listen to the interview for examples)
Two, you see public education funding Is being increasingly squeezed. We’re talking about taxes going down, not taxes going up. Having access to the private capital market is a requisite for building capacity. You see that explicitly outside of the United States, especially in emerging markets, where governments have real challenges in trying to educate their population. They are spending their efforts in trying to get their populations literate, and the private markets are the ones who can pay for upper secondary and higher education.
The two reasons are that private capital leads to innovation and that there just is not enough money to build the capacity that is needed
I feel strongly that there is a huge opportunity investing in education outside the US. There is no question in my mind that direction of the world is to increasing higher levels of education (listen to the interview for why, for the Pearson and Laureate examples, and the long term as opposed to short term outlook).
Let's look at higher education for a minute. There is certainly some truth to the belief that private for-profit institutions as an industry, have taken a great deal of money from the federal government, not delivered against the promises that were made to students, and then saddled the students with debt while they took the profits. On the other hand, what's often ignored is that the community college community hasn't really had significantly better results. Similar graduation rates and student success rates, but instead of the students being saddled with debt, the expenses are hidden because they are borne by the whole population through taxes. So we've had two different methods, and if the goal is employable adults who are able to support themselves in a middle class lifestyle, both have really failed. Some part of that, of course, is that these individuals are leaving our K12 education system, and they really are not prepared for whatever comes next, life, career, or higher education. But looking at 18 to 30 year olds today, what do you think the real opportunities are to improve their lives?
Some of these issues are that our political goals have been about improving access, that if we provided more access to higher education. That aspect worked really well, but didn’t solve the entire problem. Now there is greater attention being applied to outcomes. That process is ongoing and it is iterative.
What the private markets bring is that you are starting to see a whole new range of models that are attempting to get at the skills people need aimed at people who may not need a four year degree. You are seeing MOOCs, low cost colleges, low cost college credit, and solutions that are trying to match up employer needs to potential employees and their education and training. We are seeing the beginning of a whole new skills marketplace (there is more on this in the interview).
Is education worth investing in?
I think the way to frame that is your risk tolerance and your time horizon. We talked earlier about the international opportunity. I think that’s the closest you get to money in the bank, both at the K12 level and in higher ed. That’s going to work for you in the long term. More speculative and exciting is this gap between what students get from education and what employers need. Some of those firms are going to hit it, and they may not look like education companies per se.
I talked before about how government can’t do everything that needs to be done and the role of private capital. The cost of using public capital is that there has to be a return. Education is something like $3 Tillion globally. It only takes a small paradigm shift in order to create a real business opportunity. You don’t have to bet on the entire education system being transformed; you just have to bet on being able to create value in some dimension in a meaningful way (there is more on this in the interview).
Over the last year, all of the large publishers have posted disappointing results. And now we've seen the HMH has hired a new CEO, McGraw-Hill Education's COO is leaving, and Pearson has a relatively new team. What do you think is going to happen in the world of education publishing?
In higher ed it’s pretty clear the publishers are being disrupted by open education resources and emerging models. It was always an oligopoly where the publishers all agreed I won’t tread on your space and you don’t impinge on mine. But they got too greedy, and the market started looking for alternatives and those alternatives are disrupting their businesses. The publishers are turning into new technology platform companies, which has opened the market to new entrants. The business model is changing. And you’d be betting will the new entrants grab the market or will the established companies adapt fast enough. We are right in the middle of it, and it’s hard to see who will prevail. There are a lot of innovations digitally that are better than what print could do (lots more details on all of this in the recording).
In K12, it’s more an institutional sale with buyers who are very risk averse and so there is less willingness to try something new to save a couple of dollars on the margin. I think the publishers are still pretty solid in K12.
We are just completing a study where we’ve been talking to district curriculum buyers around the country. You should talk to me in a few weeks on what changes we are seeing in K12 buying behavior, and in how they are using content.
What do you think would be something good to invest in?
I would say that Laureate education at $14 is a steal; I don’t see how you’re not going to make money if you buy Laureate at $14. The entire world is going to increasingly be attending higher education, and they are going to need private partners, and it is pretty clear that Laureate is going to be a key participant in that (more on what to look for in investments in the interview).
Trace, what's next for you?
At this moment where there are a lot of exciting things happening in the private markets, and a lot of public companies that are in decline. There aren’t a whole lot of public EdTech companies to invest in. I’m looking at a lot of opportunities, some with private companies, maybe I’ll be in another capacity like private investing or banking. I’m exploring at the moment.
You’ll be at ASUGSV in Salt Lake City next week if anyone wants to reach you, right?
I’m sure everyone who is anyone is going to be trying to get a meeting with you. Hope to see you there.
(In an earlier version, I forgot to press the shift key, so I typed 43 Trillion, instead of $3 Trillion. My bad.)