| NEW YORK
NEW YORK Aug 1 The investors gathered in a tony
private club in Manhattan were eager to hear about the next big
thing, and education consultant Rob Lytle was happy to oblige.
Think about the upcoming rollout of new national academic
standards for public schools, he urged the crowd. If they're as
rigorous as advertised, a huge number of schools will suddenly
look really bad, their students testing way behind in reading
and math. They'll want help, quick. And private, for-profit
vendors selling lesson plans, educational software and student
assessments will be right there to provide it.
"You start to see entire ecosystems of investment opportunity
lining up," said Lytle, a partner at The Parthenon Group, a
Boston consulting firm. "It could get really, really big."
Indeed, investors of all stripes are beginning to sense big
profit potential in public education.
The K-12 market is tantalizingly huge: The U.S. spends more
than $500 billion a year to educate kids from ages five through
18. The entire education sector, including college and
mid-career training, represents nearly 9 percent of U.S. gross
domestic product, more than the energy or technology sectors.
Traditionally, public education has been a tough market for
private firms to break into -- fraught with politics, tangled in
bureaucracy and fragmented into tens of thousands of individual
schools and school districts from coast to coast.
Now investors are signaling optimism that a golden moment
has arrived. They're pouring private equity and venture capital
into scores of companies that aim to profit by taking over broad
swaths of public education.
The conference last week at the University Club, billed as a
how-to on "private equity investing in for-profit education
companies," drew a full house of about 100.
In the venture capital world, transactions in the K-12
education sector soared to a record $389 million last year, up
from $13 million in 2005. That includes major investments from
some of the most respected venture capitalists in Silicon
Valley, according to GSV Advisors, an investment firm in Chicago
that specializes in education.
The goal: an education revolution in which public schools
outsource to private vendors such critical tasks as teaching
math, educating disabled students, even writing report cards,
said Michael Moe, the founder of GSV.
"It's time," Moe said. "Everybody's excited about it."
Not quite everyone.
The push to privatize has alarmed some parents and teachers,
as well as union leaders who fear their members will lose their
jobs or their autonomy in the classroom.
Many of these protesters have rallied behind education
historian Diane Ravitch, a professor at New York University, who
blogs and tweets a steady stream of alarms about corporate
profiteers invading public schools.
Ravitch argues that schools have, in effect, been set up by
a bipartisan education reform movement that places an enormous
emphasis on standardized test scores, labels poor performers as
"failing" schools and relentlessly pushes local districts to
transform low-ranked schools by firing the staff and turning the
building over to private management.
President Barack Obama and both Democratic and Republican
policymakers in the states have embraced those principles. Local
school districts from Memphis to Philadelphia to Dallas,
meanwhile, have hired private consultants to advise them on
improving education; the strategists typically call for a
broader role for private companies in public schools.
"This is a new frontier," Ravitch said. "The private equity
guys and the hedge fund guys are circling public education."
Some of the products and services offered by private vendors
may well be good for kids and schools, Ravitch said. But she has
no confidence in their overall quality because "the bottom line
is that they're seeking profit first."
Vendors looking for a toehold in public schools often donate
generously to local politicians and spend big on marketing, so
even companies with dismal academic results can rack up
contracts and rake in tax dollars, Ravitch said.
"They're taking education, which ought to be in a different
sphere where we're constantly concerned about raising quality,
and they're applying a business metric: How do we cut costs?"
Investors retort that public school districts are compelled
to use that metric anyway because of reduced funding from states
and the soaring cost of teacher pensions and health benefits.
Public schools struggling to balance budgets have fired
teachers, slashed course offerings and imposed a long list of
fees, charging students to ride the bus, to sing in the chorus,
even to take honors English.
The time is ripe, they say, for schools to try something new
-- like turning to the private sector for help.
"Education is behind healthcare and other sectors that have
utilized outsourcing to become more efficient," private equity
investor Larry Shagrin said in the keynote address to the New
He credited the reform movement with forcing public schools
to catch up. "There's more receptivity to change than ever
before," said Shagrin, a partner with Brockway Moran & Partners
Inc, in Boca Raton, Florida. "That creates opportunity."
Speakers at the conference identified several promising
arenas for privatization.
Education entrepreneur John Katzman urged investors to look
for companies developing software that can replace teachers for
segments of the school day, driving down labor costs.
"How do we use technology so that we require fewer highly
qualified teachers?" asked Katzman, who founded the Princeton
Review test-prep company and now focuses on online learning.
Such businesses already have been drawing significant
interest. Venture capital firms have bet more than $9 million on
Schoology, an online learning platform that promises to take
over the dreary jobs of writing and grading quizzes, giving
students feedback about their progress and generating report
DreamBox Learning has received $18 million from investors to
refine and promote software that drills students in math. The
software is billed as "adaptive," meaning it analyzes responses
to problems and then poses follow-up questions precisely pitched
to a student's abilities.
The charter school chain Rocketship, a nonprofit based in
San Jose, California, turns kids over to DreamBox for two hours
a day. The chain boasts that it pays its teachers more because
it needs fewer of them, thanks to such programs. Last year,
Rocketship commissioned a study that showed students who used
DreamBox heavily for 16 weeks scored on average 2.3 points
higher on a standardized math test than their peers.
SPECIAL ED AS A GROWTH MARKET
Another niche spotlighted at the private equity conference:
Mark Claypool, president of Educational Services of America,
told the crowd his company has enjoyed three straight years of
15 percent to 20 percent growth as more and more school
districts have hired him to run their special-needs programs.
Autism in particular, he said, is a growth market, with
school districts seeking better, cheaper ways to serve the
growing number of students struggling with that disorder.
ESA, which is based in Nashville, Tennessee, now serves
12,000 students with learning disabilities or behavioral
problems in 250 school districts nationwide.
"The knee-jerk reaction [to private providers like ESA] is,
'You're just in this to make money. The profit motive is going
to trump quality,' " Claypool said. "That's crazy, because
frankly, there are really a whole lot easier ways to make a
living." Claypool, a former social worker, said he got into the
field out of frustration over what he saw as limited options for
children with learning disabilities.
Claypool and others point out that private firms have always
made money off public education; they have constructed the
schools, provided the buses and processed the burgers served at
lunch. Big publishers such as Pearson, McGraw-Hill
and Houghton Mifflin Harcourt have made hundreds of
millions of dollars selling public school districts textbooks
and standardized tests.
Critics see the newest rush to private vendors as more
worrisome because school districts are outsourcing not just
supplies but the very core of education: the daily interaction
between student and teacher, the presentation of new material,
the quick checks to see which kids have risen to the challenge
and which are hopelessly confused.
At the more than 5,500 charter schools nationwide, private
management companies -- some of them for-profit -- are in full
control of running public schools with public dollars.
"I look around the world and I don't see any country doing
this but us," Ravitch said. "Why is that?"