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The path(way) of least resistance

The pathways sector has grown precipitously over the last few years thanks to a spike in the international student market. Now as it matures, diversification appears to be the name of the game, finds Daniel Thomas

When it emerged last year that the University of Gloucestershire was thinking about running its business school in partnership with a for-profit company, some said it was the first time a university department, “teaching primarily UK students”, faced having a business take a substantial stake in its ownership. INTO University Partnerships, best known as an international education firm, was to provide the capital to build a new business school on the campus. The school would then be run as a public private partnership (PPP) with the university holding a 51% stake.

In the end the deal fell through, but for those observing the development of firms like INTO it was emblematic of a broader shift. The company and its rivals, such as Study Group, Cambridge Education Group, Kaplan and Navitas, have grown rapidly over the last five years thanks to PPPs of a different kind. They have teamed up with scores of institutions around the world to run foundation, or ‘pathway’, courses that prepare international students for degrees at the partner institutions. The ultimate goal is to increase the size of the university’s international student populations, while shouldering the hassle of having to market these courses globally. 

With the number of students studying abroad globally rising sharply over the last decade, profits at the pathways firms have shot up. However, experts say that while the growth of the sector remains solid, it’s beginning to slow down, with competition intensifying and opportunities in previously core markets diminishing. 

It’s pushed the biggest firms to diversify, either by venturing into new geographies like the US or – as was instanced by the aborted tie-up between INTO and Gloucestershire – by expanding upon the relationships they already have with their university partners. And in theory at least, the opportunities appear to be endless.
A heady ascent

To understand the growth of the pathways sector it’s important to fathom the gargantuan growth of study abroad globally. According to the OECD’s Education at a Glance Report (2011), in 1970 there were just 800,000 students studying outside of their home countries, but by 2009 that figure had reached 3.7 million and it is expected to reach seven million by 2020. 

For Western universities (and increasingly those in other parts of the world), this cohort represents a rich source of revenue and is especially vital at a time when government funding for higher education has been curbed in countries such as the UK and US. But while institutions recruit a large proportion of these international students by themselves, not all of them are particularly good at it, which is where pathways providers have come in.

“When it comes to international recruitment, universities have realised they need to move beyond a ‘build it and they will come’ model, which has become really vulnerable as the international student market gets more competitive,” explains Mike Boxall, higher education expert at PA Consulting. “The pathways providers offer a solution here, and can also push slow moving universities to innovate in other areas, which has to be good.” 

With their more developed agent networks, larger marketing budgets, and freer access to private capital, firms like INTO are said to find it easier to attract overseas students – cleverly funnelling them into partner institutions through myriad foundation courses and taking a cut of the revenue in the process. 

The result has been a quiet explosion in pathways contracts, particularly in the UK and Australia, the most mature markets at present. According to the Observatory of Borderless Higher Education (OBHE), a think tank, an estimated 110 universities worldwide have pathways deals serving about 40-50,000 students in total. The largest operations enrol more than 1,000 students at any one time, and the number of joint ventures in existence has likely quadrupled in a decade. 

Things are changing though; while the big companies continue to grow, their opportunities in the core UK and Australian markets have started to diminish. Last year Andrew Colin, INTO’s chairman, said that a “natural plateau” for pathways activity in the UK was “not a long way off”. That’s firstly because Britain has seen a slowdown in tertiary level recruitment due to its unfriendly student visa policies, secondly because competition for international students from emerging study destinations like Canada has intensified. Meanwhile, in Australia two businesses – Study Group and Navitas – have pretty much sown up the market making it difficult for newcomers to enter. 

It’s led operators to explore new regions with varying degrees of success. Anglophone destinations tend to be most popular with international students and so we’ve seen a few partnerships in Canada. There have also been a handful of deals in the Netherlands, where many degree courses are now taught in English. Collectively this doesn’t amount to much, though, and there are not a huge number of other suitable countries to exploit. Richard Garret, head of the OBHE, says this is because the pathway business model is predicated upon “a combination of top destinations and high tuition”. 

“Unless more countries in continental Europe move to charge international students market-based tuition, pathway alliances seem unlikely. France’s recent discussion of raising fees may point to opportunity. It seems unlikely Germany will go down this road… and few Asian countries could compete right now or provide sufficient margins.” 

The glaring exception – and in most observers’ minds the biggest opportunity – is America, whose large international student market remains relatively untapped. Welcoming some 886,000 overseas students to its universities and colleges in 2013/14 – 8% more than the previous year – the US is by far the most popular study destination on the planet. And yet according to the OECD, in 2012 just 4% of all its tertiary level students were international, compared with 18% in Australia and 17% in the UK.

“The US has long been the most attractive market place from an international student perspective because they have more world class institutions there than anywhere else,” explains Matt Robb, managing director at Parthenon EY. “So if you think about this from a supply and demand point of view there are plenty of places where the US simply has more capacity in the system than the UK.” 

Recognising this, and the fact that many US institutions have faced budget cuts since the financial crisis, pathways firms have been piling into the country. The market has been further encouraged by a recent relaxation of federal government policy governing the use of foreign-based agents to recruit overseas students. The biggest players all have partnerships, with some arguing that INTO leads the way in terms of volume; Shorelight Education, a new US-based player, has also popped up to try and get a piece of the action. 

But firms should be wary of putting all their eggs in the US basket. As Garrett notes, while the US government has softened its stance on outsourced international recruitment, many institutions remain sceptical about commercial partnerships in this sector. “I would expect to see more US pathways emerging but I do not expect explosive growth. The strength of the US brand bolsters ‘natural’ demand, and most US universities are a long way from the international enrolment intensity of the average UK or Australian university, so are not yet bumping up against particularly challenging recruitment goals.”

Another reason not to become too dependent on any one region is that student visa policy can change over time, and often unpredictably so. For this reason firms have tried to hedge themselves by spreading risk across territories. Linda Cowan, managing director of Kaplan International Colleges, for example, says she recognises “the increased importance of continuing to diversify our student source countries and innovate the programmes we offer”. 

The US is certainly the biggest opportunity in terms of size and potential, she says, but the firm is also continuing to grow its operations in the UK and Australia, and to expand its range of in-country pathway programmes from those it currently operates in Japan, China and Nigeria to include the Middle East, other parts of Africa, Central and South America and SE Asia.

New model army

With a limited number of regions in which to seek expansion, the pathways firms are also expanding the range of products and services they offer, as instanced by the INTO-Gloucester proposal. A popular strategy is to hug closer to existing partners and support them in new projects. Some like Kaplan and INTO run branch campuses at home or abroad, offering full-blown degree courses on behalf of their partners. A number have developed property, INTO for example is funding at least £200 million of infrastructure projects on its partners’ campuses. 

Another area of experimentation is helping partners to take their courses online. Study Group for instance taught 8,600 students online last year, either exclusively or as part of a blended programme. A good example is the online MBA it runs with Imperial College. “A third of university students in the US now take at least one module online; it is a trend that will continue and we are determined to be part of it,” says chief executive David Leigh.

Broadening and deepening collaboration is one thing; doing more yourself is another. Many pathways firms also deliver education independently of their university partners – be it business courses, vocational education or English language training – and are always looking to expand these services. Some are also creating products for much younger international students, the best example being Cambridge Education Group which owns a number of internationally-focused sixth form colleges and high schools in the US. 

Robb says this is a “very sensible and attractive thesis” illustrating how there are broadly two types of customer in this market. “The first is reactive, tending not to be interested in international education until they fail to get the exam results they need and take a pathway to get into their university of choice. The second are more proactive. There are an increasing number of families who intend to go international from the start, and who are pulling their kids out of their local school system much younger to send them overseas. So we’re seeing boarding propositions for kids as young as five, and CEG has very sensibly reacted to that by going down the route of becoming more like a school.”

End of the pathway

As the big players spread their wings they must be wary of new upstarts. Over the last few years we’ve seen the emergence of Shorelight, which has won contracts with both US and UK institutions, and the UK’s Oxford International Education Group (formerly ISIS Education), which has expanded upon a very successful English language training business and taken on investment from Bowmark Capital. 

With the number of international students studying globally set to more than double by 2020, such firms will likely have opportunities to challenge the incumbents. But they will need to be canny. Universities tend to be risk averse and are more likely to partner with companies with scores of existing partnerships and huge agent networks than unproven newcomers. 

Robb says there is “possibly room for one or two more players of scale in the space, probably out of the English language sector and someone who’s already got a big agent network”. However, a more likely outcome is that we’ll see consolidation, with bigger players snapping up the smaller ones. 

Another risk, Garrett points out, is from the public sector taking things back in-house. There have been some prominent institutions pulling out and going it alone, notably Australia’s Macquarie University and Navitas. “Going forward, all pathways need to continue to demonstrate compelling value-add for partners to dissuade others from considering ending the alliance and running everything in-house. I don’t think we know enough about the long-term value – to student and university – of commercial pathways versus other arrangements.”

As for the future of the pathways firms, it is not unfeasible that we’ll see exits in the next few years. Navitas is already listed while Kaplan is an arm of the much larger US conglomerate Graham Holdings. But Study Group, INTO and CEG are all owned or part-owned by private equity and likely to change hands. 

Robb says that in the current climate, listing would be a natural choice for these businesses given their scale and the huge multiples equivalently sized education firms have attracted in recent times. A good example is school group Nord Anglia, which was valued at $1.7 billion (£1.1 billion) for its IPO in March 2014, about 20 times its earnings.

There has been some speculation that Study Group will be first to go, although Leigh declines to comment, saying it would be a decision for the firm’s US owners, Providence Equity. They bought Study Group for AUS$660 million (about £344 million) in 2010 and would probably make a huge return on their investment. But there would be no harm in them holding on a bit longer. Study Group currently teaches about 70,000 students per year and Leigh believes he can increase that to 100,000. 
“The pathway market is far from saturated,” he says bullishly, “it is still very young in relative terms.” 

Posted on: 08/05/2015

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