Laureate, a for-profit education firm, finds international success (with a Clinton’s help)


Douglas Becker, the chairman and chief executive officer of Laureate Education, listens during a panel discussion at the Clinton Global Initiative Latin America in Rio de Janeiro, Brazil, in this 2013 file photo. (Dado Galdieri/Bloomberg)
January 18

Inside a building on a narrow Rio de Janeiro street, nine telemarketers sit in small cubicles, talking frenetically into headsets as scripts scroll across their computer screens.

On an October morning, these salespeople are urging high school seniors to attend Centro Universitário IBMR, a for-profit university. Their supervisor, Rafael Morine, strains to be heard above the clatter of an air conditioner.

“Remember, today we are offering 30 percent discounts,” he tells a young woman.

Before the day ends, he says, his team will make almost 1,300 calls. The call center sits on the top floor of the nine-story building, above classrooms. Some telemarketers are students at IBMR who take classes at night.

“They know their school well,” says Morine, 28. “And that helps us sell.” Fliers taped to the walls promise bonuses to salespeople who persuade at least 250 students to take the entrance exam for IBMR. One poster advertises the university’s owner, located almost 5,000 miles away in Baltimore: “Be part of Laureate Network, the biggest university network in the world.”

Internationally, salespeople such as these have helped Laureate Education become a for-profit higher-education juggernaut. Laureate, which was spawned from the tutoring chain Sylvan Learning Systems in 2004, owns 75 schools in 30 countries.

It has 800,000 students, up from 243,000 seven years ago, making it the largest U.S. for-profit college company by enrollment. Since it went private in 2007, Laureate’s annual revenue has more than tripled to $4 billion.

Though Laureate isn’t well-known in the United States, it employs one of the country’s most recognizable figures: former president Bill Clinton. In 2010, the company hired Clinton to serve as its honorary chancellor. In this paid position, Clinton has trekked to Laureate’s campuses in countries such as Malaysia, Peru and Spain, making more than a dozen appearances on its behalf.

Laureate is backed by several of the biggest names in finance, including Henry Kravis, George Soros, Steve Cohen and Paul Allen. When Laureate’s founder and chief executive, Doug Becker, persuaded these investors’ firms to take his company private in a deal worth $3.8 billion, Kravis’s firm, KKR, took a $487.5 million stake.

By 2010, according to a KKR memo to investors, its investment had increased in value to $710.8 million.

Laureate has thrived by exporting many of the practices that for-profit colleges adopted in the United States, such as offering career-oriented courses and spending heavily on marketing. Such strategies helped build what was a booming industry until 2010, when recruiting abuses and mounting student debt spurred a regulatory crackdown by the Obama administration.

As a result, the Bloomberg U.S. For-Profit Education Index has fallen 54 percent since its 2010 peak. Enrollment at Apollo Education Group’s University of Phoenix has declined 44 percent to 269,000, according to regulatory filings.

Laureate’s supporters say the company performs an important service by expanding access to education in emerging markets. In January 2013, the World Bank’s investment arm, the International Finance Corp., invested $150 million in Laureate.

“Many universities, after Laureate has invested, have been able to put their houses in order, apply financial discipline and really grow,” says Atul Mehta, a director at Washington-based IFC.

That growth may come at a cost. While some of Laureate’s colleges rank high in private surveys, including Universidad Andrés Bello in Santiago, Chile, and Les Roches International School of Hotel Management in Bluche, Switzerland, others have drawn criticism from teachers, students and government officials.

They say Laureate boosts revenue at struggling colleges by turbocharging enrollment, often without a parallel increase in academic investment. Since Laureate took over IBMR in 2010, its quality ranking among small colleges in Brazil has dropped to 132 from 41, according to the government’s National Institute of Studies and Educational Research.

In April, the Rio State Legislature’s Investigative Commission on Private Universities issued a report criticizing for-profit colleges for firing professors. It singled out Laureate’s takeover of IBMR.

Education as ‘commodity’

“They have turned education into a commodity that focuses more on profit than knowledge,” says Robson Leite, the Rio state legislator who led the probe.

Laureate counters that several of its schools in Brazil have improved in government rankings since 2009.

Laureate has stirred controversy throughout Latin America, where it derives two-thirds of its revenue. In October, Chile’s National Accreditation Commission voted to strip accreditation from one of the company’s schools, Santiago-based Universidad de Las Américas, or UDLA.

In its decision, the commission wrote that, since 2010, UDLA’s academic standards have suffered as it has added almost 10,000 students while reducing the number of full- and half-time teachers to 399 from 408. Graduation rates were as low as 15 percent in some majors.

“The unsatisfactory results revealed in this evaluation process show a serious problem in academic operations,” the group wrote.

Some UDLA students say its reputation has declined.

“I meet people all the time who transfer here when they flunk out elsewhere,” says Arturo Bisono, 25, an agronomy major. “This has become the place you go when no one else will accept you.”

Laureate says the number of teachers at UDLA has grown since 2009. It has appealed the withdrawal of accreditation; if the appeal fails, new students will be unable to get government loans.

Laureate’s fiercest defender is its 47-year-old chief executive, Becker, an entrepreneur who started his first business as a teenager. He dismisses the complaints from government officials in Brazil and Chile. IBMR was almost bankrupt when Laureate bought it, he says.

“The choice was to be highly ranked or have a viable scale,” Becker says. “I feel we have done the right thing.” He says the Chilean commission misunderstood Laureate’s nontraditional approach to education.

Becker, who didn’t attend college, describes himself as deeply passionate about education. “You can be a serious educator with high standards and still think of the student as your customer,” he says at breakfast at a Manhattan hotel.

Becker’s peers in the education industry paint him as a tireless promoter, skilled at pitching Laureate to investors and persuading universities to sell to him.

“He’s a hustler, for sure,” says Michael Moe, the chief executive of GSV Capital, an investment fund that specializes in education. “Basically, he saw this gaping hole in the market and drove a truck through it.”

When Becker talks about Laureate, he sounds like he’s discussing a nonprofit, not a private-equity-backed business.

“We really started with a goal of bringing increased access to higher education to countries that aren’t as well served as the U.S.,” he says.

As Laureate has pursued growth in developing countries, it has capitalized on demographic trends. More people in emerging markets are joining the middle class, but there aren’t enough colleges to meet the soaring demand.

In Latin America, for example, higher education has long been dominated by state-run schools and Catholic universities. Most of these schools are inexpensive or free but have limited space.

The supply shortfall has driven governments to embrace private operators. In Brazil, where just 17.4 percent of 18-to-24-year-olds attend college, President Dilma Rousseff has increased the number of government-backed student loans sevenfold and for-profit companies have flourished.

“Education is the industry of the future,” says Paulo Guedes, chairman of Rio-based Bozano Investimentos.

In the past three years, Guedes says, his $155 million investment in Brazilian education firms has tripled.

In August, Laureate, which owns 11 Brazilian institutions, agreed to buy university chain Faculdades Metropolitanas Unidas, inciting protests from local teacher and student unions.

Private operators have long dominated higher education in Chile, where just 23 percent of college students attend public institutions, according to the Paris-based Organization for Economic Cooperation and Development.

In 2011 and 2012, hundreds of thousands of Chilean students staged protests, demanding free college education and clashing with riot police armed with tear gas. President Sebastián Piñera responded by raising taxes to fund student loans.

Former president Michelle Bachelet won a landslide victory in December to succeed Piñera on promises of free college education for the poor and tighter regulation of tuition and profit at private schools.

For-profit education is technically illegal in Chile. Laureate has legally circumvented the ban, it says, by acquiring seats on the boards of colleges and then selling services such as building management and online courses to those schools.

The company used the same tactics to establish a presence in Turkey, where for-profit colleges are also banned. Since taking control of Istanbul Bilgi University, Laureate has boosted its enrollment by 44 percent, to more than 12,000 students, and raised its tuition by more than 50 percent to $14,000. A round of staff cuts in 2011 prompted protests from faculty holdovers, who unsuccessfully tried to form a union.

‘Needs of the students’

Becker says he started Laureate because traditional colleges weren’t serving their customers.

“I found that most universities were inward-looking and focused on the needs of the staff and faculty,” he said, “and not so much focused on the needs of the students.”

Though Becker’s glasses and dark suit make him look like a banker, he speaks in a gentle tone, like a kindergarten teacher. His only hobbies, he says, are spending time with his two young children and chairing nonprofits, such as the International Youth Foundation.

A Baltimore native, Becker started his first business when he was in high school, while working at a ComputerLand store with his friend Christopher Hoehn-Saric. The duo conceived of a swipe card that could store patients’ medical records. They sold the idea to Blue Cross Blue Shield of Maryland for an undisclosed amount in 1985. Becker was 19.

After buying Porsches, Becker and Hoehn-Saric started a small investment firm, Sterling Partners. In the early 1990s, they took a stake in tutoring chain Sylvan Learning Systems, then owned by KinderCare Learning Centers, and took it public.

By 1999, Sylvan was booking more than $300 million a year in revenue and its stock value had risen almost 500 percent. Around that time, Becker traveled to Spain to research the education market and found his next business venture.

He bought Universidad Europea de Madrid, a small, indebted private school, for $26 million. By 2004, Sylvan had taken over 17 more schools in Europe and Latin America. Becker spun off Sylvan’s tutoring business and renamed the company Laureate Education.

Though Laureate operates mainly overseas, it runs five U.S. schools, including Minneapolis-based Walden University, which grants online graduate degrees in nursing and education.

The company struck a deal in March with the Thunderbird School of Global Management, a business school in Arizona. While Thunderbird will remain a nonprofit, some alumni argued that the deal would taint the school’s reputation, and five board members resigned.

“When they have control of these schools, their focus is on generating cash,” says former board member Merle Hinrich, the chairman of a Hong Kong export services company.

Becker says those critics are misinformed about Laureate. He points out that Walden has avoided many of the pitfalls that befell other U.S. for-profits.

“What does that tell you?” Becker asks. “It tells you that just being big for the sake of profit isn’t what drives us.”

Becker took Laureate private in 2007, he says, because he wanted to pursue a long-term strategy. Along with New York-based private-equity firm KKR, Laureate’s investors include Soros Fund Management, Allen’s Vulcan Capital and Cohen’s SAC Capital Advisors, the hedge fund that agreed in November to pay $1.2 billion to settle allegations of insider trading with the Justice Department.

Soros, the hedge-fund manager with a net worth of $23 billion, established a graduate school, Central European University, in his native Hungary. Representatives of SAC, Soros and Vulcan declined to comment.

Brian Carroll, a KKR partner, praises Laureate’s approach.

“The company focuses on the value proposition to the student and ensuring that the students are well positioned to find a job after leaving a Laureate university,” he says.

Laureate considered going public in 2012 and then decided against it, apparently because of regulatory issues in Chile, says Trace Urdan, an analyst at Wells Fargo who covers the education industry.

“I expect they’ll be ready to come back and try,” he says.

Becker declines to comment on whether the company will pursue an initial public offering.

Urdan says Laureate has mastered the art of acquiring small, indebted schools and making them bigger and profitable. According to a 2012 Laureate bond memorandum, the company spends more than $200 million a year on advertising, including television commercials, online campaigns and billboards.

“The first thing they do is bring in the marketing machine,” Urdan says. “Then over a few years, they turn their attention to the operating side of things and make costs more efficient.”

Laureate showed how fast it can transform a small college at Rio’s IBMR. IBMR was a family-run college founded in 1974 by Herminio da Silveira, an orthodontist who loved to teach. Silveira died in 2013. When Laureate bought IBMR in 2010, the school had 1,500 students and offered seven health-related majors, including physical therapy and psychology.

Laureate has boosted enrollment to about 4,500. It added majors targeting fast-growing job markets in tourism, sports and health services.

Laureate has also revamped the school’s sales operation. At IBMR’s telemarketing center, which didn’t exist before the company arrived, the school pays recruiters based on the number of students they sign up, a tactic that the U.S. Congress restricted in 1992 to stem misleading marketing gimmicks.

IBMR’s growth stems in part from its low admissions standards. Students who score as poorly as 20 percent on the entrance exam can get in, according to the school.

“It’s not about the student that comes in but the quality of the student that goes out,” says Marcelo Cardoso, a Laureate vice president.

Educators say Laureate employs too many part-time teachers.

Since 2005, the number of full-time teachers at Universidad Europea de Madrid, the college Becker bought in 1999, has declined to 22 percent from 52 percent, according to government data. Laureate says UEM is “one of the most prestigious universities in Spain.”

Becker says part-time professors aren’t necessarily inferior.

“I don’t see why we have to accept as gospel this particular tenet, that full-time professors equal quality,” he says.

Star power

Laureate has bolstered its image with the help of former political leaders such as Condoleezza Rice, Al Gore and Tony Blair, who have made appearances at Laureate schools.

The company’s biggest coup was hiring Clinton. The former president declined to comment on his role, and Laureate wouldn’t disclose how much he’s paid. Becker says Clinton joined Laureate because he believed it has a strong social mission.

Laureate has installed several people from Clinton’s administration in key executive and board positions, including Richard Riley, the former secretary of education; Joseph Duffey, the former head of the U.S. Information Agency; and Henry Cisneros, who served as Clinton’s secretary of housing and urban development.

Pictures of Clinton line a walkway at Laureate’s Bilgi University in Istanbul. Photos of him also hang outside the rector’s office, along with images of Becker and Turkey’s prime minister, Recep Tayyip Erdogan.

In 2010, Laureate’s UEM gave an honorary degree to Erdogan. In the summer of 2013, hundreds of thousands of Turks protested Erdogan’s development of an urban park and his suppression of political dissent.

In recent years, Erdogan’s government has allowed dozens of private universities to spring up, says Yuksel Kavak, a professor of education at Hacettepe University in Ankara.

“Turkey is in the process of changing, especially in higher education,” he says.

Bilgi’s main campus, built around an old power plant, is nestled in a blue-collar neighborhood in Istanbul. Students clutching books and cigarettes scurry across the grassy courtyard, which is ringed by modern buildings, several of which were built after Laureate began managing the university. The company’s flag flies high near the entrance.

When Laureate struck a deal with Bilgi in 2006, the college was deeply in debt. The company soon clashed with its founder, telecommunications entrepreneur Oguz Ozerden, over whether to shift Bilgi’s focus from the humanities to vocational areas, such as health sciences. Ozerden resigned, and Laureate installed a new administration.

In 2012, Bilgi closed its modern-art museum to use the space for classrooms. The school stirred further controversy in 2013 when it auctioned off its collection of several modern works by Turkish artists for about $7 million.

Some Bilgi professors praise Laureate’s remake of their school.

“There’s constant innovation and constant thinking about how to be appropriate to the Turkish market and how to be international,” says Asu Aksoy, an associate professor in the department of arts and cultural management.

Bilgi’s chairman, Rifat Saricaoglu, says Laureate has improved the school by adding departments such as engineering and architecture.

“What we have promised, we have delivered,” he says. Saricaoglu, who heads the trade group for private universities, has urged the government to allow Bilgi to open more campuses. If that happens, he says, the school’s enrollment could more than double to 30,000 students by 2015.

Such rapid growth has occurred at many Laureate schools, alienating professors and government officials. At the same time, it has resonated with investors. Saricaoglu says the company’s growth in Turkey will prove valuable when it goes public.

“If you want to go to Wall Street one day,” he says, “you need to have a good story.”

The full version of this Bloomberg Markets story appears in the magazine’s February issue.

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75

schools in 30 countries.

800k

students, making it America’s largest
for-profit college company by enrollment.

$4b

annual revenue since going private in 2007.

$1 5 0m

Investment in Laureate by the World Bank’s investment arm, the International Finance Corp., in January 2013.

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