Opinion: Jeremy Harrison

It is summer, it's academic results season, and we love to fret about deteriorating standards in our higher education establishments. In contrast, the value of a UK degree to overseas students, and more importantly their fee paying parents, is a strong as ever (particularly in Asia and the Far East). This is why many queue up to pay substantial fees to study here, fees that in turn partly subsidise their domestic counterparts.

The value of UK degrees has clearly been illustrated by the princely sum recently paid for BPP last year, the only for profit degree awarding body in the UK. The £368m was stumped up by Apollo Global, a subsidiary of American education behemoth Apollo Group who own the commercial powerhouse that is the University of Phoenix.

Why have they made their move now? Well, it seems inevitable that Government coffers will no longer stretch to subsidising degrees for all. Indeed, many students will have to start paying the true cost of a degree in the future (about £10,000 in real money). In conjunction with a Coalition Government who favour private providers competing with universities to award degrees, this means there is clearly a recipe for private organisations to make money in the future.

As a result, many are desperate to gain entry to the UK Higher Education sector and, if further evidence was needed, witness the news yesterday that BPP has been awarded coveted University College status. This status is so special it has been immediately reflected in their name, herald the beginning of BPP University College and a more competitive, for profit, degree awarding sector.

It appears that making money out of selling mainstream holiday packages is a difficult business these days – witness recent interim losses reported by Thomas Cook and TUI Travel.

The mainstream package holiday market is mature, competitive and low margin, whilst operators need to be particularly adept at controlling costs while accurately matching supply with demand. This is before contending with the challenges of consumers increasingly constructing DIY holiday packages, the odd failing airline, unpredictable foreign exchange movements and the occasional ash cloud! In contrast, the specialist travel market is somewhat more attractive. The experience, destination or bespoke service being sold is usually more important than price, leading to higher margins, while it is a market that continues to grow in totality.

The expertise, brands and customer loyalty of many of these businesses has often been built over years by entrepreneurs with a passion for the product. This appears to have led to a number of mid market businesses dominating particular travel niches. This is a difficult attribute for large corporate businesses to replicate effectively and, as such, they have resorted to acquiring specialist travel businesses in recent years to access growth and profits.

Indeed, the most prolific acquirer, TUI Travel, recently announced the issue of a £550m bond to fund, in part, further acquisitions. This is after acquiring twelve businesses in their most recent full financial year alone, eleven of which they described as in specialist sectors and included a yacht chartering business and a number of school trip, adventure and sport tour operators. Other notable examples include Kuoni who bought luxury tour operator Carrier and Wyndham’s acquisition of holiday park, cottage and boat holiday business Hoseasons.

So for those entrepreneurs and private equity owners of successful travel specialists out there, one suspects that a ‘knock on the door’ may not be fair away.

The coalition Government has been in power about 9 and half weeks and the impact on the education and training sector has certainly been marked (with a knife!)

The Rt Hon Michael Gove, Schools Minister, has recently announced the axing of all Building Schools for the Future schemes that have not reached financial close, abolition of the ICT procurement quango Becta and the raiding of the Harnessing Technology Fund to provide some cash for the much vaunted free schools initiative.

Not to be outdone, the Rt Hon Vince Cable, the Business, Innovation and Skills Secretary, has cut and redirected funding away from perceived failing Labour training programmes such as Train to Gain towards apprenticeships and urgent college building programmes following the abolition of the shambolic Building Colleges for the Future initiative in 2009. Then there are the swingeing funding cuts announced to the Skills Funding Agency and Young Persons Learning Agency that will inevitably define the scope of their future roles in administering vocational training funding.

Finally, there is the Rt Hon Iain Duncan Smith and his Department for Work and Pensions, who have recently given notice of the termination of the Flexible New Deal (FND) welfare to work programme (just over one year into the five year prime contracts that commenced in October 2009). They are now asking for tenders for the participation in a rather vague framework for the provision of employment related support services which will replace FND in April 2011.

What does this mean for private equity and their interests in the education and training sector? While a looming fiscal crisis arguably required this degree of political ‘shock and awe’, it is certainly unlikely to encourage long term investment by private equity in the sector. However, while the road maybe rocky for their portfolio businesses in the short term, such significant and rapid change does also lead to opportunity. Those businesses and investors who are able to react and exploit an education and training market that is going to feature more, rather than less, private sector involvement in the future could well emerge stronger, and richer, from the austerity age.

The £100m plus acquisition of Melorio by Pearson has certainly raised some eyebrows amongst the established fraternity in the vocational skills training market. Most of those I speak to seem to welcome the entry into the sector of such a highly regarded and respected company. The question they ask me is, could Pearson be buyers of our business in the future?

In the wake of a period of aggressive consolidation led by Carter & Carter, one that ultimately led to their demise, Melorio was floated as the new sector consolidator in 2007. Following the acquisition of Construction Learning World at float, Melorio never really gathered a head of steam on the buying front and indeed ran out of proverbial puff after the acquisition of Zenos in 2008. Not surprising in many respects given that the equity and debt markets were drying up at this time and the environment for attracting additional LSC funding became increasingly challenging and uncertain.

In a sector characterised by the fact that there is more sellers than buyers, many ask whether Pearson will use some of their cash pile to reinvigorate consolidation in the UK vocational skills training market. Personally, I think the hopes of a new white knight maybe dashed. Pearson, and its education content business, spans the entire globe and applying the highly successful Zenos academy model into overseas markets appears to be their priority in the short term.

Whether it is financial institutions or volcanos, Iceland cannot keep out of the headlines! Following a difficult 2009, with consumers reigning in spending on travel by 8% from the year before, 2010 was set to be a year of modest recovery for the travel industry – that is according to the recently published Kelkoo European Travel Index which forecast growth of 2% in 2010.

Whilst the unprecedented tectonic related disruption will clearly have had a detrimental impact on industry profits, reassuringly it seems that forward bookings for most UK travel businesses are some way ahead of the same point last year corroborating this conclusion.

However, for me, the most revealing feature of this research is that we Brits appear to be the most savvy buyers of travel in Europe – nearly three quarters of us use the internet to research and buy our holidays compared to the European average of just over half. This fact ensures the UK is home to the largest online travel market in Europe and many of its leading businesses. Indeed, the UK online travel market is predicted to deliver yet more recession busting growth in 2010 and is now expected to be one third larger than just two years ago.

It is fair to say, this trend has not gone unnoticed by another one of our leading industries, namely private equity, whose investments in recent years include Expotel, On the Beach, Iglu and youtravel to name just four. The continued consumer migration towards buying travel online, the ability to rapidly scale revenues and an attractive landscape for selling at the right time to one of the acquisitive European travel majors suggests that the dynamics for achieving good returns from this sector still look pretty compelling, and it is certainly a part of the sector I think will remain vibrant for some time to come.

Over the last five years, VT Group has built one of the largest educational services and vocational training businesses in the UK. Their services range from the provision of computers to schools under BSF through to Government funded training of teenagers in the art of cookery and hospitality. With a large cash windfall for acquisitions from the sale of their stake in the BVT joint venture last year, they were seen as the obvious acquirer for many education service providers and technical training businesses that resided in private hands.

However, with the news that VT and Babcock are to tie up to create a new giant, the apple cart is somewhat upset" Many city commentators seem to be fretting that the acquisition will empty the pockets of Babcock and with the deal complete, a divesture of many of the proverbial non core parts of VT Group to raise cash seems inevitable. Aside from military training services, I would expect many of the education and training activities undertaken by VT Group to be on the stocks. No doubt the private equity community is keeping a watchful eye on events.

It seems that funding cuts recently announced in the pre-Budget report will heap yet more pain on the university sector. Indeed, The Institute for Fiscal Studies thinks the knife could cut much deeper post election highlighting the fact that the unprotected, big spending, departments like higher education, defence and transport could all see annual reductions to their budgets averaging 5% in each of the next three years. This, they argue, is necessary to protect spending in the ring fenced departments like health and schools while credibly reducing the deficit.

With a strain on university finances already apparent given swollen student numbers, I read with interest the recent announcement that Cambridge University is planning to raise £300 million of capital from the bond markets. This is the first time in its 800 year history that it has borrowed a meaningful sum of money and follows in the wake of a number of other universities that have announced similar plans.

Of course, this is nothing new. On the other side of the Atlantic, the ‘Ivy League’ universities have long borrowed from the capital markets reflecting their commercially shrewd outlook and their lower reliance on state funding. However, I think this development does signify the start of a gradual shift in the UK towards universities becoming more independent from central Government. I expect them to increasingly raise capital privately, broaden their range of commercial activities, enter more partnerships with business and exercise greater control over their admissions and course programmes.

Clearly one should not underestimate the challenges universities will face transitioning away from the state. Without doubt, some will succeed where others will fail. However, the long term trend seems clear; universities will increasingly access the banking, bond and private markets to fund their development which should open a whole new sector of investment to financial institutions.

Headlines over the last two years have been pretty depressing no matter who you are (unless you are a paid economist of course!).

Consumers have been bombarded by a relentless torrent of bad news which they may, or may not, also be experiencing first hand through unemployment, weaker promotion prospects and lower earnings. This appears to be driving consumers to the point of seeking an escape from reality manifesting itself in increasing participation in low cost leisure pursuits, staying at home and consuming more media. Nothing like taking the proverbial ‘mind off things’.

With a weak final quarter of growth recently announced for 2009, the prospects for a rapid change in consumer psychology is limited. Indeed, there is a school of thought that these changes will become ingrained and shape consumer attitudes when economic circumstances improve. Consumers will be more choosy about how they spend their money and they are likely to prefer cheaper options, such as the TV, on-line entertainment and outdoor pursuits. The desire to travel is likely to remain as strong (many have now tasted far away shores) particularly among the young - limited job prospects for middle class graduates often translates into travelling the world! However, for the wider family travel market, constraints on household budgets may mean many consumers will settle for destinations that are either less luxurious, closer to home or arranged and booked directly.

It also seems quite plausible that the more family centric leisure activities shaped by the recession will be here to stay. This will benefit a host of markets from indulgence foods, take-aways and alcoholic drinks through to gardening, gaming and internet services, 5-a-side football and DIY. Many of these sectors have been unloved in recent years, although their long term prospects for growth now look appealing and robust.

What does this mean for deals? More private equity investment in these areas and better prices for sellers.

2009 was the year Flexible New Deal went live heralding the end of a multitude of Government funded programmes aimed at getting the unemployed off benefit and into work. Following the DWP announcement of prime contractors, which included a few surprises, the focus last year was centred on the ‘merry go round’ of prime contractors securing sub-contractors to deliver the programme.

The hiatus has now passed and it seems increasingly likely that a flurry of deals may follow suit in 2010. At the smaller end, most businesses focused on Government funded skills training have experienced a turbulent year and have an envious eye on the security of a five year DWP contract with learner volumes driven by recession. This will encourage some to buy into the market.

More interestingly, the market is still fragmented with no natural counterweight to Serco’s presence. Given the prevalence of private ownership in the sector, it seems likely that sellers of businesses will exist for those investors willing to buy into or build presence in this space. Witness the management buy-out of JHP Training backed by Lloyds Development Capital announced recently - I do not expect this to be the last private equity investment in the sector in 2010.

Branded consumer product businesses were highly sought after assets at the top of the economic cycle. Double digit profit multiples were paid for leading consumer brands and retailers including Jimmy Choo, Fat Face and Farrow & Ball. However, they quickly fell out of vogue when the threat of the UK consumer deserting the UK high street loomed large.

The Christmas trading statements of the UK's leading retailers have made interesting reading with John Lewis performing particularly strongly over this period. The main conclusion drawn from these results is that the brand conscious UK consumer has proved more resilient than many expected through the downturn and therefore investors are already beginning to look at who the winners and losers are. The usual question for an investor or bank to ask when assessing a consumer business is "How did they perform through the last economic downturn?" Historically we had to cast our minds back a number of years to answer the question, however now the question is "How has the business performed over the last 2 years?"

So who are the winners and losers? There has been a lot written about the success of the discount retailers and the demise of the luxury brands, however this is a very polarised view of the market and the majority of consumer businesses do not fit either category. There have been winners and losers across the spectrum and the key to success has been who has trusted their brand strategy and correspondingly delivered a product that their target customer wants at the right price point.

Buyers of consumer brands are back in the market and looking for bargains. However, if you are thinking about selling my advice is not to start discounting the valuation of your business. You have been successfully marketing your product offering over for the last 2 years in a difficult economic environment so don't forget these principles now when considering whether to sell your business.

Hot on the heels of the joint Apollo / Carlyle acquisition of UK based BPP plc, the London based international buy out house BC Partners has sent money back across the Atlantic having recently acquired US vocational training specialist, ATI Career Training Center, for $500m. In common with Apollo, albeit on a smaller scale, ATI is a leading provider of vocational diplomas, certificates and associate degree programmes through their training centres across the States.

Given this deal was, in effect, a secondary buy out it will be interesting to see whether the next stage of corporate development, and growth in shareholder value, involves acquisitions. BC Partners are quiet on high level strategy in their deal announcements although the sophistication and maturity of the career and professional development training market in the US is well known – witness the scale of the likes of Apollo, Career Education Corporation, ITT and Bridgepoint Education. This suggests to me that overseas acquisitions could well be on the corporate agenda and, given the residency of BC Partners, that could well include within the UK.

What do plumbing, IT support, social work or accountancy have in common? Answer, the chances are that a handful of those that count themselves as one amongst these professions were a former steel worker, milkman or, increasingly, banker!

The career change phenomenon is nothing new and many training businesses exist out there to help learners fulfil their dreams. This comes at a price, and in the past this was often paid in cash up front on the interest free credit card or by way of personal loan. Ultimately, this led to many trainers becoming addicted to the cash now, training later model.

With personal credit difficult to obtain, trainers are finding those ‘cash rich’ learners harder to come by whilst they continue to deliver some existing programmes when the cash has long been spent. This breeds opportunity for those with robust balance sheets and access to capital, those very providers who are now able to operate ‘pay as you go’ programmes. In the next few years, I expect some of those career change trainers with strong brands, yet weak finances, to be ripe acquisition targets.

The postman will have recently shocked many Government funded training providers with their annual Maximum Contract Value (MCV) letters for the forthcoming academic year. These MCV's are nothing new, only now they mean something as the near defunct LSC (and its successors) undertake a seismic shift from largesse to austerity.

For the uninitiated, these pieces of paper were often meaningless if training providers could demonstrate learner demand and corresponding achievement. The LSC would simply pay up and many providers prospered from this stance.

That was then, this is now and the treasury is tightening the purse strings considerably (witness the shambles of the flagship LSC Building Colleges for the Future programme). These contract values are now real caps on turnover and growth and for many providers this means short term headaches. However, in the long term, I expect a leaner funding environment to accelerate consolidation in the sector given that organic growth will certainly become more challenging.