State of the tertiary education market
The Australian tertiary education sector comprises two distinct but increasingly overlapping sub-sectors:
- Vocational Education and Training (VET) comprising qualifications at the Certificate I to the Advanced Diploma level, including apprenticeships
- Higher Education (HE) comprising undergraduate qualifications (Diplomas, Advanced Diplomas, and Bachelor degrees) and postgraduate qualifications (Masters and PhDs).
The HE sector is dominated by Australia’s 40 universities, accounting for 94 per cent of enrolments. Out of 1.3 million domestic and international student enrolments in 2013, 129 non-university higher education providers (NUHEPs) account for approximately 54,000 full-time students (Norton 2015).
The VET sector enrolled 1.88 million students in 2013. There are currently around 4,600 Registered Training Organisations (RTOs) delivering courses and qualifications across Australia. Historically, the VET market has been dominated by the near monopoly of state TAFE Institutes. As part of a policy trend towards increasing competition, recent government reforms have led to private RTOs now accounting for 29 per cent of publicly subsidised enrolments nationally; these reforms are most advanced in Victoria where private RTOs have increased their market share from 21 per cent in 2010 to 57 per cent in 2014.
A small number of large, listed private RTOs (Navitas, Academies Australasia, Kaplan) are prominent across Australia. Nevertheless, the VET market is highly fragmented and ripe for consolidation, with over 3,500 RTOs having only 15 or fewer accredited qualifications on their scope of registration (by comparison, a typical TAFE institute offers between 100 and 500 accredited qualifications). Recent market activity suggests that industry aggregation is well underway, in tandem with growth in private provision as a result of reforms at the national and state levels. Examples of market aggregation include the widely observed rise and fall of Vocation Ltd, other IPOs (Australian Careers Network, Ashley Services Group), increased foreign investment (Intueri) and the role of private equity in M&A activities (Study Group, Careers Training Group, Redhill).
Challenges for valuing future market activity
The VET and HE sectors are highly regulated industries reliant on state and Commonwealth government funding, alongside a vibrant fee-for-service market. Industry players are acutely aware of the current state of flux – particularly the Commonwealth Government’s proposed reforms to make demand-driven funding available to NUHEPs at the Diploma, Advanced Diploma, and Bachelor degree level.
Given the policy, regulatory, and fiscal uncertainty, a number of factors must be taken into account when estimating and/or valuing future market activity.
- Uncertain and opaque contract assessment and renewal: In order to receive government funding for VET, in addition to sectoral accreditation through the relevant regulators, providers have to undergo a process of application and qualification to become a contracted provider. In response to growing quality concerns, these processes have become more onerous, less certain and persistently opaque. The cancellation or non-renewal of such contracts will have a material impact on future returns.
- Volatile subsidy rates: In our recent review of state government VET contracting and funding models, it became apparent that variable approaches to skills reform and competition are being taken; the common factor is volatility in funding rates. Valuations of future enrolments should be based on a realistic range of funding levels, informed by the underpinning framework for subsidy setting. The 2016 HE funding rates announced in the 2014-15 Budget highlight that these rates are also at the whim of government.
- Decreasing competitive neutrality: For the most part, governments continue to support an ongoing role for private RTOs and NUHEPs and increased competition. That being said, some state governments (most notably NSW) have implemented funding for VET in a way that is decidedly pro-TAFE. Likewise, the newly elected governments in Victoria and Queensland have announced their intent to bolster the position of TAFE in the market, potentially curtailing private RTO growth.
- Diminishing expectations of Commonwealth Government higher education reform: The wide-ranging higher education reforms proposed in the 2014-15 Budget are looking increasingly unlikely of being realised. Those reforms would have been of most significance for NUHEPs, providing access to uncapped Commonwealth funding for undergraduate qualifications, albeit at 70 per cent of the rate attracted by universities.
- The role of management, board preparedness, and quality systems: The experience of Vocation Ltd has highlighted that regulatory approvals and compliance alone are not sufficient to sustain appropriate internal cultures and practices, or the necessary quality assurance, risk management, and disclosure systems and processes at the executive and board level. Future IPOs will undoubtedly seek to evaluate adequacy in these areas, as well as an underlying sustainable and appropriately diversified business strategy.
- The predisposition of regulators: The national regulators – the Australian Skills Quality Authority (ASQA) and Tertiary Education Quality Standards Agency (TEQSA) – are both being reinvigorated after a period of public dissatisfaction with their performance. ASQA is investing in data analytics in order to more effectively administer its risk-based model, while the leadership at TEQSA has been completely refreshed. The regulators and their respective approaches will determine the burden of compliance, the speed of new providers and products to market, and the barriers to entry.
- Major reform in related areas: The tertiary education sector is not isolated from trends and policies in other related sectors. For example: adult literacy and numeracy programmes will be affected by changes to employment services; Australia’s migration rules and intake will continue to have material implications for international student demand; reforms to the way VET qualifications (training packages) are developed will influence the relevance to industry and viability of courses in the future; and industrial relations and labour market conditions will influence the attractiveness of study, particularly apprenticeships and traineeships.
Future IPO and M&A activity will undoubtedly be tempered by the ruinous fate of Vocation Ltd, which at its launch heralded a new phase in the maturing of the sector. That being said, substantial opportunities remain for value creation through economies of scale and scope, increased professionalisation of RTOs, consolidation of back-office and compliance functions, and more efficient systems and structures more generally.
Quantifying market value
The publicly funded tertiary education sector in Australia is a data rich environment which allows for detailed analysis of the market share and growth prospects for any given NUHEP or RTO. From mid-2015, data will be available for the first time on privately funded VET activity.
Based on our examination of recent prospectuses and other reports, the analysis of market value is generally underdone. More detailed analysis could significantly assist interested parties to understand and assess market value.
ACIL Allen Consulting routinely undertakes analysis at the level of individual market players, including of likely levels of future demand based on demographic trends, industry and economic conditions, regional competition, and market settings and funding levels.
Based on our experience in working with governments, public and private providers, and financial advisers, the available data support extensive due diligence to examine, verify, and quantify key determinants of market value, including:
- Enrolments at a given provider as a share of the total market at the national, state, and regional level
- Current and emerging competitors for fields of education or specific courses
- Enrolment growth and market position compared to key competitors
- Degree of market power (including assessments of potential ACCC issues with market concentration)
- Underlying demographic and participation rate drivers
- Likely industry demand, particularly for occupation-specific qualifications
- Regulatory risk
- Government funding models, subsidy rates, and associated revenue streams
- Revenue forecasts, based on those dimensions listed above.