Schools Rush in

The demand for private education - especially at primary level - has outstripped supply, opening the gates to a flood of commercial outfits ready to exploit the opportunities. But will their need for profits prove incompatible with maintaining educational standards?

by Stephen Cook
Last Updated: 31 Aug 2010

Wetherby is a pre-preparatory school in west London with a certain aura: it's where Prince William and Prince Harry started their education.

So when it was announced last autumn that a Wetherby preparatory school was planned as well, there were more than 130 applications in a few weeks.

'That's far in excess of the number of places the school will have,' says Ryan Robson. 'People were coming on board before we'd even found a building or a head teacher.'

Robson is a director of Sovereign Capital, the private-equity company that stepped in 18 months ago to take a majority holding in Davies, Laing & Dick, the company that used to own Wetherby and several other schools with top-drawer names like Dr Rolfe's and Falcons. It wasn't long before Robson and his colleagues renamed the group Alpha Plus (subtitled 'The gold standard in education') and embarked on the programme of expansion through which Wetherby Prep will open in time for the new academic year in September.

Sovereign is not the only outfit to have noticed the imbalance between demand and supply in private education, especially in London and some of our other major cities. For eight years running, the number of pupils in private schools - especially primary schools, known in the sector as preparatory or 'prep' schools - has been growing.

The latest opinion polls show that more than 50% of parents would choose independent schooling for their children if they could afford it, and many, like Labour MP Diane Abbott last year, are prepared to sacrifice a few socialist principles in the process. So a variety of commercial beasts are prowling the private education jungle, sniffing out the opportunities and looking for the right moment to pounce.

Sovereign's business model is to spot, buy into, rationalise and expand schools or groups of schools. 'Davies, Laing & Dick had been family-owned for 40 years and it woke up one morning with a succession problem,' says Robson. 'We were able to come in with the capital and also attract a high-quality management that could balance the language of people like us with the softer issues of handling people. We think one of the reasons why the schools' market is attractive is precisely because it is fragmented and often has these succession issues. There's more capacity for consolidation than in other sections of the market.'

Another prowler has a different model. While Sovereign operates at the top end of the market where parents are prepared to pay almost any price, GEMS - Global Education Management Systems - believes the trick is to learn lessons from the hotel industry. It uses economies of scale to provide day-school education for about £5,000 a year, compared with the average of £6,500. Simon Cummins, director of schools at GEMS, is confident. 'I know it's going to work,' he says. 'We're supplying a solution that is heavily in demand.'

The chairman of GEMS is Sunny Varkey, an Indian businessman whose parents founded the quaintly named Our Own English High School in Dubai 30 years ago to cater for expatriate Indians. That grew into a network of 20 schools with 40,000 pupils in the Middle East, offering a distinctive brand of education to the English-speaking community in the region. Last year, Varkey decided it was time to expand into the UK itself: GEMS has already bought two existing schools, Bury Lawn in Milton Keynes and Sherborne House in Chandlers Ford, and is prospecting for other opportunities from its plush offices in London.

'The landscape in British private education hasn't changed for so long now, and the current market is totally polarised,' says Cummins, formerly an educational consultant and master at Millfield public school. 'You've got the maintained sector and the highly prohibitive independent sector, which provides for only about 7% of the population. And we know from our own research, which has been backed up by the latest Mori poll, that over half the country would opt for independent education if they could afford it.

'That's a clear indication that parents are not satisfied with the level of choice they have for educating their child. And I think parents are now so much more informed - because of the internet, because of more accessible information and more accountability - about what is on offer and how that stacks up against the rest of the world. So we feel there is a huge opportunity to come in and offer quality education at a more affordable price.'

As well as buying existing schools to provide what it calls 'a platform for the brand', the company is looking for suitable buildings to turn into 'GEMS model schools', and for greenfield or brownfield sites where it can build new schools. Like hotels, there would be three-star and five-star versions of its schools: all would have excellent classroom education, says Cummins, but some would have extra facilities with higher fees to match.

'At the moment we are inundated with people coming to us,' he says. 'One group of parents in Cambridge has offered us land to build a school. We've spoken to local head teachers and they say they would welcome it. We don't want to be seen as competition - we want to go where there is a need because demand outstrips supply. There are some growing communities - Swindon, for example - where sufficient education is just not there.'

Sovereign Capital is not the only private-equity firm with an interest in schools, and GEMS is not the only outfit interested in establishing a chain. It's clear that this is what in the US would be called a 'validated market'; a lot of people are convinced that money can be made, and a head of steam is building up. But not everyone in the world of private education sees a commercial future through spectacles quite as rosy as those being worn by the likes of Robson and Cummins.

Tobyn Thomas, for example, runs Thomas's London Day Schools, a group of three preparatory schools and two kindergartens in south London that has been built up by his family over the past 20 years. The pupils wear neat blue uniforms, the schools charge about £9,000 a year and have long waiting lists. Thomas says he's frequently asked if he wants to sell, but so far he's not interested.

'The VC boys are all over this thing at the moment, but I think they've got a very unrealistic view of education,' he says. 'I think it will be a disaster for children if schools are run by businessmen because good education - where people work hard for the joy of it and aren't in it for the money - is incompatible with the return on capital that they'd require.'

Teachers' salaries account for at least 60% of the running costs of a school, and Thomas says that to make more money or charge lower fees inevitably would mean employing fewer people. That, he argues, is the beginning of the end of the kind of broad curriculum that he believes is the key to a high-quality education.

'You can run schools on less money, but kids have got only one childhood,' he says. 'Would parents pay £2,000 a term to have their children sit in a classroom rather than £3,000 and have specialist PE and art teachers, and IT rooms? Some will go for it because they can't afford the higher price, so the thing won't be a complete failure. It will work better in some areas than others, and I'm sure they'll find a niche of some sort.

But parents will know what's going on - they know when you're doing something for profit.

'What's new at the moment is that businessmen are coming in, thinking they know best, and I hope they experience a conversion along the lines of realising that return on capital is less important than educational satisfaction. There are no second chances in education. So, no, I don't fear what they're doing nor do I want to emulate it - absolutely not.'

Both GEMS and Sovereign Capital, however, assert in their different ways that they do not fall into the money-grubbing category of which Thomas is so suspicious. They are adamant that they are committed to high-quality education and not out to make short-term profits. 'We are first and foremost an education company and have been for 30 years,' says Cummins. 'We are miles apart from the venture capital firms, which are looking for something more short term. We are a solid rock for the future; we're not a Plc looking for shareholder returns.'

Robson, who says 'private equity' is a more accurate description of Sovereign's business, concedes that the fears raised by Thomas are understandable.

'We are an investor and we seek to maximise returns. But we're in it for the long term, not the short term. The sector is in its infancy in terms of corporate involvement, and we're prepared to be patient.

'If people require some testimony about our quality, it is that the chairman of Alpha Plus is Angus Fraser, who was formerly managing director of Imperial College and would have agreed to join only if he thought we were serious about education. And we're not trying to create a single model. We know that in education, if you get rid of the ethos of a school and run things from the centre, you've lost the plot. That's what gets pupils through the door and makes for happy parents.'

Thomas, however, is not the only sceptic. Nord Anglia, a public company that receives half its turnover from working in partnership with state schools and half from its private and international schools, is concentrating on building English-language schools in places such as Warsaw and Shanghai.

It's also working closely with the UK Government on increasing the involvement of private companies in the state sector.

'We don't see the UK as a key area for growth,' says Nord Anglia's chief executive Andrew Fitzmaurice. 'We're a Plc and the return we can get from our international activities is better than from schools in this country. Partnering the public sector to drive the government agenda for schools is at the heart of what we want to do. GEMS has a different model from us - what they call the hotel model, which is a highly replicated and controlled business model - and it hasn't been tried in the independent schools sector in the UK. So we will be watching with interest.'

At the Independent Schools Council, which represents 85% of independent schools, Dick Davidson says GEMS has a strategy that makes sense in areas that have a demonstrable unmet demand for private education. 'It's certainly true that parts of the country are undersupplied,' he says. 'These areas are not difficult to spot, and there's no reason why new schools should not be successful.

'But I'm not so sure whether these famed economies of scale will produce lower costs to the consumer or higher profits for the investor. Almost all the projects I've come across that purport to offer low-cost independent education result either in lower standards or poorer working conditions for teachers.

'You can't make significant inroads into costs without at some early point coming up against the cost of staff, who account for up to 70%.

And research suggests that the most important thing parents like for their children is smaller classes and the individual attention and teaching that this produces. That's the challenge for outfits like GEMS.'

Whatever the arguments about cost-savings, there is agreement all round that independent education is going to grow in the coming months and years.

An increase as low as 1% in the proportion of children leaving state education would call for a 10% growth in the private sector, according to Gary Narunsky, finance director of GEMS. 'At the moment, it's still only 7% of children who go to private schools,' he says. 'An extra 7% over time would keep us very happy indeed, thank you.'

But the question of how much it is going to grow is, by common agreement, a political one, and under Labour 7% would seem out of the question. Davidson of the ISC thinks that more Labour advisers are arguing for the state to purchase more education from the private sector, but that's not the same thing as private schools. The policy that would really give private schools a boost is education vouchers, and Davidson feels that the prospects of Labour ever adopting them are minimal.

Under Michael Howard's leadership, the Tory party remains committed - after a pilot policy - to what it calls an education passport, which would be worth between £3,500 and £4,500 and could be spent at any kind of school, including private. If a private school cost more, however, the policy says that the shortfall could be made up by a bursary, but not by parents.

'That kind of parental top-up would be quite a big step,' says a Conservative party spokesman. 'It has been advocated by the more right-wing think-tanks, but we're holding back from that.'

It seems clear that parental topping-up of vouchers would lead to a private-sector feeding frenzy, but for that there would need to be not just a Conservative election victory but a significant further step in Conservative education policy - one that would would be hugely disruptive to the country's education system, at least in the short term.

But even without a Conservative victory, it's clear that the entrepreneurs are happy enough. Says Robson of Sovereign Capital: 'The market will definitely get bigger. I think how big depends very much on what happens politically.

If things become more flexible, then the expansion could be explosive.

If things remain as they are, it will be quite modest.

'But even if there's no great overall growth, we'll still achieve our objectives. Getting the pupils through the door is not an issue, so long as we continue to provide a good education and good results.'

AVERAGE ANNUAL FEES 2003

Boarding schools £17,800

Weekly boarding schools £13,600

Day schools

£6,500

SOURCE: INDEPENDENT SCHOOLS COUNCIL

HIGHEST AND LOWEST ANNUAL FEES Boarding, highest:

Winchester

£21,500

Benenden £21,450

Harrow £21,000

Boarding, lowest:

Casterton, Kirkby Lonsdale £15,000

Christ College, Brecon £15,600

Queen Margaret's, York £16,250

Day, highest:

Westminster £14,300

Sevenoaks £13,450

St Paul's

£12,850

Day, lowest:

St Gerard's, Bangor £4,950

Westholme, Blackburn £5,650

Twycross House, Atherton £5,700

SOURCE: THE SUNDAY TIMES PARENT POWER MAGAZINE

WHERE THE MONEY GOES AT AN INDEPENDENT DAY SCHOOL

Teaching 60%

Buildings & grounds 16%

Administration 11%

Other expenses 7%

Catering and medical 6%

SOURCE: INDEPENDENT SCHOOLS BURSARS

ASSOCIATION (2001 FIGURES)

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