Last year we posted a blog, 13 Dreaded Announcement Headlines, with our most notorious list of headings we’d rather not hear from companies.
Those headings are usually an attempt by management to obfuscate, euphemise or just avoid blame for bad news. But there was no mistaking the ominous sounding announcement from Intueri Education Group (IQE) on Friday, which was titled Notice of Serious Fraud Office Enquiry. The body of the announcement was bang in line with the title, one of Intueri’s colleges, Quantum Education Group, is under investigation for fraud.
They’re not the only business in the education sector to run into trouble with regulators lately. Vocation (VET) filed for administration this year, and Australian Careers Network (ACO) looks headed for a similar fate, both facing allegations of rorting government funding with inappropriate practices for enrolling students, poor course content and teaching standards. Intueri’s shares, just like peer Ashley Services (ASH), are down more than 90% from their highs, and it’s probably fair to ask why investors would place any trust at all in the beleaguered vocational education sector.
In hindsight it is so easy to see these businesses were dodgy, but a couple of years back it was a different story. With the government opening up the sector to private competition, these businesses seemed to tick every box. They had stable government contracts, fantastic margins, required little capital and had vast potential for growth. Investors welcomed them with open arms.
Reality has obviously fallen well short of expectations. So what can we learn as investors for next time? Unfortunately, it is mostly difficult to know what is happening on the ground. After all, everything you read from the company makes them look great, and a reputable education provider is often a wonderful businesses. It’s only later, when rumours start swirling in the newspapers, and announcements begin to dribble out about regulatory concerns, that it becomes clear business practices were unsound and students weren’t achieving great outcomes. By then the losses are mounting.
Instead, the lesson for me is simply to be wary of industries that suddenly erupt from a new government policy, particularly those that are virtually 100% government funded. The fact that students could enroll in courses, at no cost to them whatsoever, created an environment ripe for abuse. Without good evidence that the business practices are really beyond reproach, investors just need to be wary of these kind of circumstances.
If an industry is new, and it could potentially be rorted, you must be suspicious of a high growth business. Companies that grow fast can often shrink fast too, particularly when they rely on just one paying customer.
10 thoughts on “Who Would Trust a Toxic Education Sector?”
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Alan Moir sums up the situation perfectly
Maybe I am missing something (outside of students being duped with iPads etc. to study with no chance of repaying the associated HELPS loans) but I don’t understand why people want to pay for a qualification from a private college most people in the general public would have never heard of (and the associated reputational risks of the college failing or being found to have acted immorally after you graduate) compared to a similar (and more enduring) qualification from a TAFE or University.
Me either. That’s actually why education businesses can be so good. If you build a good reputation, employers like to hire your graduating students. Once students work that out the demand to enrol increases. Then you can slowly ratchet up fees and the course difficulty, and a virtuous cycle builds.
True but would require management to consider a longer term strategy for success in tempting circumstances where the current HELP fee rules (which fund the student’s studies in advance without claw-back / withholding provisions for subsequent student failure / drop-out) enable channel stuffing to occur for immediate lucrative financial results.
A great deal of this “growth” happened in Victoria where the govt decided that TAFE was fat, bloated, lazy etc etc and needed some private competition yumminess to whip it into shape.
So a lot of funding was removed from TAFE, then TAFE sites were closed, staff laid off, and the private peoples were handed the money to do the same job – in theory. In practice, greed and a pot of gold intersected and now we see the results.
The students of these PTEs are either dipstick locals or foreigners using the PTE to get into the country without having to get into university.
Good step to get into the country without having anything but some money
The money used to pay for these courses is money ripped out of the TAFE sector. Tafe targets students who are looking for skills employers want. This private education sector targets students who will never earn the Help threshold, i.e because of disabilities, learning or language difficulties etc. It’s all about earning from the Government, the students are just the traded goods. A friend of mine who works in the charity sector told me a story about one of their clients with a intellectual disability, on a disability pension, being signed up by one of these collages in Victoria. They were never going to complete the course, but that didn’t matter it was the students signature that was all important.
The best thing that can happen is if the money was returned from these colleges to the TAFE sector.
That’s why value investors never buy companies without a long term track record of earnings.
People do what they’re incentivised to do. In the case of the Subprime lending incident, borrowers were enticed to take out loans they had no hope of repaying. Some of the worst loans offered funds in excess of 100% of the security and zero repayment terms for a few months without requiring evidence of income or assets. The majority had a teaser interest rate of say 2% reverting to 10%+ after 2 years (Which is why it took 2 years for the defaults to start unraveling the industry). If you say to someone “free money” then people will take it.
In the case of the private education sector, the offer to the students was ‘sign here and you get a free laptop, you won’t have to pay any money unless your income reaches a certain level’. The prospective students were people from poor and disadvantaged areas that had no intention of attending the course or paying back the loan, they just wanted the free laptop. The incentive for the providers was that the government paid up front for each student signed. The government created an incentive for signups, it failed to link payments to education outcomes. If a program can be rorted, it will.