POST-SECONDARY EDUCATION PANDEMIC AND ELECTION SLOW DEAL ACTIVITY IN THE INTERIM BUT RESURGENCE EXPECTED IN NEAR TERM October 2020 3 POST-SECONDARY EDUCATION Pandemic and Election Slow Deal Activity TABLE OF CONTENTS INDUSTRY OUTLOOK Industry Outlook Colleges and universities have faced countless challenges from the COVID-19 Key Trends & Drivers pandemic as in-person classes ceased, graduations went virtual, and Boards 2020 M&A Overview weighed risks and safety concerns for the 2020-2021 academic school year. Immediate impacts for the Post-Secondary industry included rapid Segment Highlights deployment of virtual capabilities and courses, the steepest drop in tuition fees Notable Transactions since 1978 (-0.7% per the Labor Department1), and significant government Select Transactions support in the form of $6 billion in grants to college students and $14 billion to colleges and universities through the March Coronavirus Aid, Relief, and Report Contributors Economic Security (CARES) Act, according to the Department of Education.2 Firm Transactions in Market Firm Track Record In addition to the disruption of the pandemic, the presidential election could have transformative impacts on the for-profit post-secondary industry, including the restoration of the Gainful Employment Rule and 90/10 going to 85/15 and military being removed from the 10 under a Biden administration. As shown on the following page, changes implemented by the Obama administration on limiting access to Title IV funding have had lasting industry impacts, causing the removal or consolidation of low-performing for-profit institutions. Most recently, this included the acquisition of Ashford University CONTRIBUTORS by The University of Arizona to form an OPM model (see page seven). Jacob Voorhees Without doubt, this year has created uncertainty and forced schools to address Managing Director, immediate issues rather than deploy growth strategies. However, as a Head of Education Practice, countercyclical sector, the volatility in the market and high unemployment rate Head of Global M&A is expected to cause increased demand for higher education as the economy’s 617-216-1543 stability remains unpredictable for the foreseeable future. [email protected] Shawn Keenan Post-Secondary Enrollment Increase in Past Recession Director 23 Education & Training Practice 312-550-5304 +19.2% 21.1 [email protected] 21 Whitt Larkin 19 Vice President 17.7 Education & Training Practice 17 703-887-5390 [email protected] Enrollment in Millions 15 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Note: Shaded areas indicate U.S. recessions; data only includes Title IV primarily postsecondary institutions Source: U.S. Bureau of Labor Statistics 2 Post-Secondary Education | October 2020 M&A TRENDS & DRIVERS DEGREE-GRANTING, FOR- Public Private Nonprofit Private For-Profit PROFITS INSTUTIONS SEE CONSOLIDATION 3,000 2,500 Changes implemented by the Obama administration 2,000 on limiting access to Title IV 1,500 funding have had lasting impacts on the industry, 1,000 causing the removal or 500 consolidation of many Institutions Number of low-performing for- 0 profit institutions. 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: National Center for Education Statistics White Black STUDENT DIVERSITY Hispanic Asian REMAINS A CHALLENGE American/Alaska Native Two or More Races FOR ENROLLMENT 15 Facilitating a diverse blend of students has become 10 increasingly important, with only minute gains since 2012 as well as an 5 actual decline of 12% in black student enrollment. Enrollment in Millions 0 2012 2013 2014 2015 2016 2017 2018 Source: National Center for Education Statistics INDUSTRY MERGER & 80 ACQUISITION ACTIVITY 70 CONTINUES TO IMPROVE 60 52 50 50 44 43 43 Deal activity has improved since 40 36 33 the Obama administration 27 tightened oversight on federal 30 25 aid at for-profit schools. The 20 removal of bad operators has Number of Transactions 10 created a prime opportunity for the remaining schools to take a 0 greater share of student 2013 2014 2015 2016 2017 2018 2019 YTD YTD enrollment and federal funding 2019 2020 in the PSE market. Note: Year-to-date (YTD) ended September 30 Source: Capital IQ, PitchBook, FactSet, and Capstone Research 3 Post-Secondary Education | October 2020 2020 M&A OVERVIEW Merger and acquisition (M&A) activity has declined 37% Monthly Transactions year-over-year through September with 27 announced or 2019 2020 closed transactions compared to 43 over the same period 15 in 2019. Deal activity sharply declined from March to May, as the Coronavirus pandemic halted in-person classes and colleges and universities looked to the coming academic 10 9 year with uncertainty. The approaching presidential election has also further compounded deal hesitancy as 6 post-secondary institutions wait to see how a potential 5 5 5 5 55 5 4 44 administration change could impact funding and the 3 33 regulatory environment. 2 Number of Transactions Number of 1 1 0 Deal activity saw an uptick starting in June, with key 0 drivers including course expansion and virtual capabilities. Schools that offered programs in computer sciences, nursing (see following pages), and trade schools were favored by buyers seeking to diversify their course offerings or capitalize on high-growth fields. Transactions were also spurred by schools seeking defensive synergies Year-To-Date Buyer Breakdown to stabilize finances amid COVID-19 impacts. Notably, in March, the private equity firm Vistria Group 11.1% acquired Unitek Learning for an undisclosed sum. Unitek Educational Institution 7.4% owns leading nursing schools Unitek College, Eagle Gate Private Company College, and Provo College, with 14 campuses across the 7.4% 44.4% U.S. In August, Vistria went on to acquire Brookline Public Company College through its subsidiary TVG-Florence, LLC (terms Private Investment Firm not disclosed) and added the college to its Unitek Other* 29.6% Learning platform. Brookline offers undergraduate and graduate degrees in Nursing, Healthcare, and Business through online and in person channels and has four Note: Year-to-date (YTD) ended September 30 campuses across Arizona and New Mexico. *Other includes government institution, individual, and unknown Source: Capital IQ, PitchBook, FactSet, and Capstone Research Acquisition Drivers During COVID-19 Cost Synergies Virtual Capabilities Eliminates duplicate costs including audits, Enables sophisticated online course capabilities insurance, accreditation fees, and Title IX and improves technological tools to enhance Compliance Officers, resulting in expanded distance and hybrid learning in the evolving profit margins and a stronger balance sheet. COVID-19 environment. Student Diversity High-Growth Fields Supports educational access to students of Offers education and training for fast-growing diverse backgrounds and demographics occupations including nurse practitioners, including low-income, first-generation, military, physical therapists, physician assistants, data and unrepresented minorities. analysts, computer programmers, and coders. Source: Capstone Headwaters Research 4 Post-Secondary Education | October 2020 SEGMENT HIGHLIGHT: NURSING Colleges, universities, and educators are strengthening Nurses In Retirement Age Expected to Fuel Demand their offerings of nursing degrees and continuing Almost 40% of the four million Registered Nurses (RNs) in the education (CE) courses as the nation grapples with a U.S. are 55-years-old or above, and the average age of an RN widening deficit of nursing professionals. Due to the is 50-years-old. As these individuals retire, a large share aging workforce, more 500,000 registered nurses (RNs) vacancies in the nursing population will need backfilled. are predicted to retire within the next two years, and the U.S. Bureau of Labor Statistics projects that 1.1 million new 15% nurses will be needed to keep up with demand and avoid a national shortage.5 Additionally, the number of jobs for nurse practitioners (which requires a master’s degree) is slated to grow at a staggering rate of 45% (117,700 new positions) between 2019 and 2029, according to the 10% Bureau of Labor Statistics.6 This immediate need and sustained demand to educate nurses is expected to create favorable tailwinds for schools with current/new offerings in the space, fueling M&A activity for nursing schools. 5% This year, the need for nurses has starkly been spotlighted Age Registered Nurses By by the pandemic, and schools including Deaconess College of Nursing, Regis College, M. Louise Fitzpatrick College of Nursing at Villanova University, and Touro 0% College have noted uptick’s in nursing enrollment, according to U.S. News.7 Notably, Hondros College of Nursing, owned by American Public Education Note: Shaded area indicated near-term vacancies (Nasdaq:APEI), reported a 56% year-over-year increase in Source: Health Resources & Services Administration as of 2018 new enrollments in its Q2 earnings results.8 Additionally, New Hampshire-based Colby-Sawyer School of Nursing and Public Health reported a 34% year-over-year increase in enrollment, according to a news report.9 Notable 2020 Nursing Education Acquisitions While educational providers must play an essential role to Adtalem Acquires Walden University train a new supply of nurses, almost two-thirds of nursing (September, $1.48 Billion) – Walden offers schools surveyed reported that they could not accept bachelor's, master's and doctoral degrees,