With Goldman's Foray Into Higher Education, A Predatory Pursuit Of Students And Revenues
Education Management Corp. was already a swiftly growing player in the lucrative world of for-profit higher education, with annual revenues topping $1 billion, but it had its sights set on industry domination.
So, five years ago, the Pittsburgh company's executives agreed to sell its portfolio of more than 70 colleges to a trio of investment partnerships for $3.4 billion, securing the needed capital for an aggressive national expansion.
One of the new partners brought an outsized reputation for market savvy, deep pockets and a relentless pursuit of profits -- the Wall Street goliath, Goldman Sachs.
After the deal closed and Goldman became a partner, employees soon noticed a drastic shift in culture.
Longtime admissions managers were replaced, ushering in an era in which recruiters were endlessly hounded by supervisors about hitting weekly enrollment targets. The admissions staff nearly tripled, requiring expanded floor space to accommodate a sales force of more than 2,600 across the country.
Management handed down revamped telemarketing scripts designed to prey on poor and uneducated consumers, honing in on their past mistakes in life as a ploy to convince them that college would solve all their problems, according to conversations with more than a dozen current and former Education Management Corp. employees over the past two months.
"You'd probe to find a weakness," said Brian Klein, a former admissions employee who worked for three years at Argosy University Online, one of four major colleges operated by EDMC. "You basically take all that failure and all those bad decisions, and you spin it around and put it right back in their face as guilt, to go to this shitty university and run up all of this debt."
Just as the subprime mortgage bubble was giving way to a bust that would help trigger a devastating financial crisis, Goldman Sachs, a firm that had been at the center of Wall Street's rampant mortgage speculation, found its way to a new area of explosive growth: In claiming what would eventually become a 41 percent stake in Education Management Corp., Goldman secured itself a means of tapping into the boom in for-profit higher education. The federal government was boosting aid to college students nationwide, just as a declining economy prompted millions of Americans to seek refuge in higher education, leading to dramatically expanding enrollments at many institutions.
But unlike in the mortgage markets, where some unwise or unlucky investor got saddled with the bad loans after the festivities ended and home prices fell, this new market in higher education boasted seemingly unlimited growth potential at virtually zero risk. The burden of college loan repayment falls entirely on students' backs, shielding corporations from the consequences of default. The colleges essentially receive all their revenues upfront, primarily through federal government loans and grants for tuition, regardless of whether students are able to gain employment and pay back their loans.
Soon after the Goldman buyout, the newly private Education Management LLC embarked on its most ambitious period of growth -- one that has recently brought it crosswise with federal prosecutors, who have accused the company of widespread fraud in its recruitment processes.
The timing for expansion had been ideal: With the help of current House Speaker John Boehner, Congress in February 2006 deregulated the world of online learning, opening a significant frontier to colleges seeking to expand their enrollments. A month after the online learning law took effect, in March, EDMC's board of directors announced the acquisition by Goldman and its partners.
The company's newly installed board, which included representatives from Goldman Sachs and the other private equity investors, sought a new team of executives to run the operations. They drew from the ranks of EDMC's biggest competitor, the University of Phoenix. Chief among those new recruits was Todd S. Nelson, the longtime former chairman and chief executive of Phoenix's parent company, the Apollo Group.
Under Nelson, the University of Phoenix had become the unquestionable star of the for-profit higher education world, boasting more than 300,000 students and revenues topping $2.4 billion in 2006 -- triple the revenues from five years earlier.
But he left abruptly in 2006, after signing a $9.8 million settlement with the Department of Education over allegations of widespread recruiting violations at the school -- allegations that have now resurfaced at EDMC.
Revenues grew swiftly at EDMC after the company was taken private in 2006
Under Nelson's new leadership, enrollment and profits at EDMC skyrocketed further.
The number of online recruits in particular grew at an astronomical rate, increasing fivefold between 2006 and 2009, after deregulation allowed the company's classrooms to become completely virtual. By late 2009 the company tapped Wall Street again, with an initial public offering that netted more than $330 million.
But a recent complaint from the U.S. Justice Department detailed a business bent on recruiting students at all costs, a description supported by the accounts of the employees interviewed by the Huffington Post. Hidden behind the upbeat earnings calls and bullish quarterly reports was a cutthroat sales culture that rewarded employees who regularly bent the truth and took advantage of underprivileged and unsuspecting consumers, employees said.
Goldman Sachs and Providence Equity Partners, the other major private equity player in the deal, declined to comment for this article.
for complete:
http://www.huffingtonpost.com/2011/10/14/goldman-sachs-for-profit-college_n_997409.html?utm_source=DailyBrief&utm_campaign=101411&utm_medium=email&utm_content=FeatureTitle&utm_term=Daily%20Brief
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