Heather Frankham, Co-Founder, Bud Systems

Last month, I had the pleasure of attending an event organised by EY Parthenon and AELP focussing on investment opportunities in UK apprenticeships and skills.

It was the first time that I can remember an event attended by training providers, private equity, Ofsted and the ESFA – all sitting in the same room to talk about the future of apprenticeships.

It felt like a pivotal moment, and it was really positive to see that, whilst each party has different objectives, we all have an important part to play in achieving targets for both the quality and number of apprentices that are trained in years to come.

The apprenticeship sector has many complexities to it, and so it was especially helpful that private equity investors got the opportunity to hear from AELP, the ESFA and Ofsted, so that they could get a flavour of the policy and regulatory compliance world that training providers operate in.

Whilst many investors may show interest in getting involved with apprenticeships, it requires a lot of groundwork to understand the sector before they will commit to acquire or put money in.

It’s certainly not the easiest of sectors to get up to speed on, but for investment funds looking to deliver social impact alongside financial returns there are many positives to investing in apprenticeship businesses.

Private equity and government-funded training have not always sat comfortably together

There have been some high-profile business failures responsible for creating scepticism from government as to whether PE backing of providers is a good thing.

Some suggest that private equity tends to be focussed exclusively on profit, or that commercial pressures lead to lower quality training, neither of which delivers the best value for the taxpayer.

Others, however, argue that PE investment into good quality training providers can enable growth and innovation to create better ways of delivering funded programmes. Training provider failures are certainly not exclusive to those backed by private equity.

As a consultant, and many years ago as an associate Ofsted inspector, I spent time with providers looking at what makes provision great, as well as at the factors that can cause quality to slip.

Most people come into our sector because they want to help others and make a difference – and my experience is that while people have great intentions and can be keen to develop new ways of doing things, if their actions are not well controlled then things don’t always join together properly.

So often providers make the complex even more complicated – adding layer upon layer onto processes that rarely add value. Providers that succeed are constantly looking to simplify things – a strategy that is never to be confused with dumbing down or cutting corners.

Simplification is all about doing things in the most efficient but impactful way, with each part of the process having its place in a flow of linked actions and behaviours that deliver the objectives.

Great simplification, however, is by no means simple – it’s an operating practice that continually evolves and gets tweaked by the things you learn.

Boston Consulting Group (BCG) have produced an excellent article on Mastering Complexity through Simplification if you are interested in reading more.

As an investor myself, whenever I have been involved in looking at possible investments, it is the calibre of the management team that, for me, is key.

You can quickly see when advisors have pulled together the IM and the management team themselves don’t own the information within it.

When senior management are not able to talk through the numbers and how they have been built up or explain trends in the data and what has driven changes (positive or negative) it rings big alarm bells. It sounds obvious but you would be amazed how many times this happens!

Management capability is crucial in determining whether or not a training provider will succeed, and here-in lies the challenge: as there are very few larger providers, the number of professional managers that can operate at scale with experience of apprenticeships is very limited.

The number with private equity investment experience is even more limited. This makes investing in businesses riskier, because if things don’t work out, it’s difficult to find managers with the experience that private equity would typically want to see.

“..we need to create c-level pathways for talented managers within the industry, alongside pathways for those outside to gain sector experience and understanding.”

For the apprenticeship sector to mature and deliver great quality at value for money, whilst simultaneously being able to manage investment effectively, we need to create c-level pathways for talented managers within the industry, alongside pathways for those outside to gain sector experience and understanding.

Wouldn’t it be great for the industry to work with a leading business school to sponsor a cohort of emerging talent through an apprenticeship MBA?

Imagine specialist workshops and lectures applying theory to the sector-specific challenges and complexities of funded training delivery...

Of course, a great management team on its own won’t be the only thing that investors look for. Investors need assurance that the business has adopted a business strategy that is sustainable and that is not likely to collapse given a change in policy or government.

Matt Robb - EY-Parthenon Education Managing Director - delivered a great session looking at the Investor Perspective of Apprenticeship Providers.

Matt highlighted the characteristics of those organisations that are winning in the new levy world and provided some particularly helpful insights into the changing dynamics in our sector.

He identified that the apprenticeship market is less mature than other UK education markets, with a fragmented set of emerging platforms and no clear winners.

Despite 10% of funding going to the top 10 providers and a long tail of small providers, we have yet to see an investment platform adopting a buy and build strategy – even though some of the private equity houses investing in this space are buy and build specialists.

I was very interested in Matt’s investment thesis around post-secondary convergence – bringing together professional, corporate, vocational and higher education, all centred around the employer.

Certainly, when you look at the winners in the new levy world in terms of growth in starts, you can see a significant number that have come into Apprenticeships from professional and corporate training.

Some have had teething problems with early Ofsted monitoring visits, although in the main, this has centred around the tracking and monitoring of learners rather than the quality of teaching which has often been reported as good.

These providers often have great relationships with Employers – something Investors value highly – they just need to develop their systems for managing learner progress through to successful completion of the whole apprenticeship.

Of course, no matter what the structure and strategy look like – we can’t ignore the fact that Apprenticeship Funding is subject to changes in Policy and Government.

With Brexit timing uncertain and a subsequent spending review planned, there are still uncertainties around exactly how apprenticeships will be funded in the coming years.

This is not wholly unusual for our sector, and providers that deliver sustained growth have demonstrated their capability to adapt to changing policy and regulation.

But it does add a level of complexity for investors looking at the sector and a lovely task for their analysts trying to model the risks of any potential changes!

Uncertainty is not a great backdrop for completing investment deals, but it is a great time for Investors to learn more about the sector and the capability of management teams.

Those providers that have been winners in the new levy world and who have demonstrated consistently good quality will be in high demand once the spending review is complete.

Investment in this sector has succeeded when the Investor understands and can get comfortable with the nuances of funding and they find a great management team to back.

For providers - now is a great time to focus on developing management capabilities, to work on simplification, and ensure what they deliver creates happy students and happy employers.

When all these factors are in place, and there is greater visibility of funding policy, investment is so much easier.

Heather Frankham, Co-Founder, Bud Systems

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