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Topic: Private firms eyeing profits from public schools
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Jerry P. Becker

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Registered: 12/3/04
Private firms eyeing profits from public schools
Posted: Aug 7, 2012 6:15 PM
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From The Chicago Tribune / Reuters, Thursday, August 2, 2012. See,0,1403754.story
Private firms eyeing profits from public schools

By Stephanie Simon

NEW YORK (Reuters) - 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?" Ravitch said.


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 York conference.

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

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 cards.

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

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.


Another niche spotlighted at the private equity conference: special education.

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 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

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?"

(Editing by Jonathan Weber and Prudence Crowther)
Jerry P. Becker
Dept. of Curriculum & Instruction
Southern Illinois University
625 Wham Drive
Mail Code 4610
Carbondale, IL 62901-4610
Phone: (618) 453-4241 [O]
(618) 457-8903 [H]
Fax: (618) 453-4244

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