Schafer: After all these years, for-profit education is just getting started

An hour spent with a trio of investment bankers from Cherry Tree & Associates talking about the education market turned out to be one of my best interviews based on a misunderstanding.

They shared a convincing story of continued growth in their merger and acquisition practice serving education clients, one of four areas of in-depth expertise at the firm. And I had thought going into the conversation that the bloom had not only come off the rose in for-profit education, but the rosebushes died.

My own thinking had been colored by the bad news still dribbling out, like in the spring when an agreement was reached for more than 900 former students of Globe University and the Minnesota School of Business to get their student debt wiped out. It was a similar story last month for former students of ITT Tech.

Most of us never got near such for-profit schools, of course. The local public school is a government operation and the "private school" nearby is almost certainly a nonprofit. That's true from kindergarten all the way through university graduate programs.

As the Cherry Tree bankers cheerfully described, the booming education market includes all the providers of software, curriculum, student assessment tools, equipment and other things those public and nonprofit schools need. And their need only seems to grow.

Cherry Tree is coming off its best year ever. It's looking to hire people who are ready to step in right away and run their own deals or projects, in education or another practice area.

Minnetonka-based Cherry Tree works on transactions between $10 million and $200 million in value. Unlike a lot of other firms that almost exclusively represent sellers of companies, Cherry Tree also will happily help clients buy other businesses or technologies.

Cherry Tree has been in education longer than it's been a merger and acquisition advisory firm. It got its start in 1980 in venture capital. In 1989 Cherry Tree helped create and finance a new company formed out of the education assets of Control Data, later called Plato Learning and, for nearly a decade now, Edmentum.

Former Plato Learning business development manager Chad Johnson, with a couple of stops in between, came to Cherry Tree in 2007 to further develop its practice in education. He primarily works with companies that supply K-12 education.

Now a managing partner, Johnson likes to work with clients producing technology to assess student learning or help deliver curriculum, sometimes for kids who are struggling with material and other kids who could learn faster and need to be challenged. He also works with clients that sell and install equipment used in schools.

FastBridge Learning could be considered a typical client, although its brief life as an independent company seems anything but typical. Created in 2015 as a bootstrapped start-up out of the University of Minnesota's tech venture center, this student assessment tools provider got acquired in 2019 with Johnson's help after reaching 60 employees and about $11 million in revenue.

I hadn't heard of FastBridge Learning or its buyer, Illuminate Education.

"There's tons of merger and acquisition activity [in the market]," said Terri Soutor, the former CEO of FastBridge, who stayed through an 18-month integration. "There's tons of capital being deployed and a lot of startups, particularly any that are providing curriculum that can be delivered online."

Cherry Tree has clients across the country, but "Minnesota does have a cluster of education companies, coming out of the [National Computer Systems], Plato Learning, Capella, all these companies that have grown up here and did really well," Johnson said. "So there's now like 40 or 50 education companies just in our region, and we would certainly love to work with our homegrown, backyard companies."

Managing Director Mike Buttry is Johnson's counterpart at Cherry Tree in the adult education sector. Buttry is a former executive with Capella Education Co., the for-profit higher-ed company acquired by publicly-traded Strayer Education in 2018.

For-profit colleges, Buttry said, attracted a slug of capital and went through a 2000s-era boom, but that explosive growth led to the industry's problems. He mentioned a few companies, including the University of Phoenix, which peaked out at hundreds of thousands of students. Eventually Phoenix all but collapsed, after appearing on a list of higher-ed operators where the students defaulted on loans at a higher rate than graduated.

In time the market corrected, Buttry said, some of the poorest-quality companies disappeared. That painful process was aided by Obama administration regulations including something called the "gainful employment rule," which meant that grads had to be able to earn enough in the jobs they trained for to pay back their student loans.

Public and private colleges and universities have market problems of their own, of course.

"This is not data, this is anecdote," Buttry said. "But you kind of fall into one of two camps if you are a traditional, nonprofit, degree-granting institution. You're either struggling to keep your current model afloat or you are looking at new ways to innovate and deliver, and meet students where they are."

The firms to watch these days, Buttry said, include the language teaching platform company Duolingo, the education management system provider Instructure Holdings and 2U, which is spending $800 million to buy the assets of a business affiliated with MIT and Harvard that offers open, online courses.

Beyond that handful of names, about $3.2 billion was invested in U. S. educational technology companies in the first six months of this year, according to venture investment firm Reach Capital. That's compared to $2.2 billion for all of last year.

Some of these startups may be trying to meet needs that didn't exist two years ago, as educators had to think through how they could teach students safely during an infectious disease pandemic. Now they have to decide which of the improvisations and innovations they need to keep doing, and what tools or services can make that easier.

With all this going on, Cherry Tree finds itself in a "really great niche," Buttry said.

"'Niche' makes it sound small," he said, correcting himself. "It is a really great space that we found to occupy."