Wednesday, June 9, 2010

Hedge funds target for-profit colleges

According to Hedgetracker.com :

Hedge funds have been circling for new carrion to devour in the next economic slowdown and have found a big fat target in the for-profit educational sector. The industry is ripe for the taking. For two decades, for-profit schools have lured gullible students with inflated promises of impressive sounding degrees which they pay exorbitant tuition to obtain.

In education's version of the subprime crisis, creative financial aid departments obtain government loans to finance the entire program. There are now over 2 million attending these institutions, accounting for 10% of all higher education in the US, and the profits that have poured in have been absolutely massive.

Early investors rode the IPO train all the way to the bank. The problem arises when few students ever achieve these laudable goals. According to government statistics, 55% of US college students obtain a degree within six years. At the University of Phoenix, with 400,000 students, the largest for-profit university, only 18% meet this deadline, only 6% at some campuses, and a mere 4% of online students. Dropouts end up defaulting on loans that can amount to as much as $100,000 for incomplete bachelor's degrees and up to $200,000 for advanced degrees.

It now looks like the gravy train is about to end. Secretary of Education Arne Duncan has promised a crack down on the industry, bringing in more regulation and prosecutions of deceptive marketing practices, where degree programs are sold like time shares. The leading accreditation organizations are also having second thoughts about the for-profits, where 95% of the instructors are part time and tenure is unknown. Complaints are rife about shoddy teaching standards and missing doctorates.

The government has funded $750 billion in student loans, and while 10% of public University loans go unpaid, the default rate at for-profit schools is thought to be as high as 50%. Starve these schools of subsidized government funding, and their shares are history. (emphasis is mine)

Take a look at the top listed for-profit universities of Apollo (APOL), Capella Education (CPLA), and DeVry (DV).

According to HedgeTracker, top hedge fund holders of Apollo as of 3/31/10 include Chase Coleman’s Tiger Global Management with 6,754,212 shares / $414mm, Lee Ainslie’s Maverick Capital with 5,683,992 shares / $348mm, Ricky Sandler’s Eminence Capital with 1,844,891 shares / $113mm, and John Paulson’s Paulson & Co. with 1,600,000 shares / $98mm.

All of the above mentioned hedge funds, except Tiger Global, made HedgeTracker’s Top Hedge Fund list of 2009.

Top hedge fund holders of Capella Education include Jim Simons’ Renaissance Technologies with 366,425 shares / $34mm and Maverick Capital with 209,669 shares / $19mm.Top hedge fund holders of DeVry include Ken Griffin’s Citadel Investment Group with 421,284 shares / $27mm and Ravi Kaza’s Seasons Capital Management with 305,223 shares / $20mm.

For Detailed Investor Profiles on these Investors, click below:
Citadel Investment Group
Maverick Capital
Renaissance Technologies Corporation
Seasons Capital Management
Tiger Global Management

Related People: Brandon Haley; Becket Wolf; Charles Wyly; Chase Coleman; David Grossman; David Hensle; Derek Kaufman; Evan Wyly; Feroz Dewan; Jeff Runnfeldt; Jim Simons; Julian Robertson; Kaveh Alamouti; Kenneth Griffin; Lee S. Ainslie; Mark Stainton; Neeraj Chandra; Ravi Kaza; Ryan Garino; Sam Wyly; Steve Weller


Related Entities: Citadel Alternative Asset Management; Citadel Equity Fund; Citadel Kensington; Citadel Wellington; Equiduct; Maverick Capital Long LP; Maverick Fund USA; Maverick Levered Partners; Medallion; New Castle Re; Nova; Renaissance Institutional Equities Funds; Seasons Aggressive Fund; Seasons Core Fund; Seasons Institutional Core Fund LP; Seasons Leveraged Core; Sowood Capital*; Tiger Global Funds; Tiger Management Corporation; Tiger Management Corporation*; Tiger Technology LP

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