Thoughts on the UK private school sector
The UK independent sector is facing a very dark night indeed. Mark Coggins, a for-profit educator, investor, and entrepreneur thinks a reset is necessary.
Stormy skies
Who would be a school Governor, Head or Bursar in the UK’s independent sector right now? VAT, the cost of living, the recent budget, an impending demographic downturn, university admission equalisation are all coming thick and fast. Add to this the inevitable financial scrutiny that schools face from money conscious parents and a seismic change is on the way for the private school sector in the UK.
Time for calm heads, detailed analysis and daring to be different. The sector will never be the same. Schools have a choice as to whether they will be part of the revised landscape, but becoming part of that landscape requires a deep dive into structure, decision making and a re-assessment of the skillset that has prevailed to date but in many cases will not stand the tests of today. The obvious response is to look to alternatives sources of income and cutting support costs, although even a good start here is unlikely to be sufficient.
Schools are like airlines
In my past life as an equity analyst, the reasons for any downturn in a business were seen as either structural or cyclical, and analysed carefully. In a worst case-scenario it was both. Different industries and companies are affected differently. Our avoids were those that in the lingo is described as having high operational gearing, i.e. a substantial proportion of costs are fixed and therefore any reduction in the volume of business goes straight to the bottom line. Think airlines with rows of seats unoccupied. Airlines which are financially strong might survive through the cycle. Those with inadequate funding either cut routes or die. You save on serving fewer meals but that is your lot. At Kaplan we described it as the “back row” indicator. If the backrow is occupied – happy days. If empty we had a problem. If the problems are structural, the solution must be structural.
Schools have the same characteristics as airlines. If you take a cyclical view and have adequate resources you might ride out the storm if the problem turns out to be cyclical. If you are a structuralist or don’t have the resources to weather what will be a long cyclical downturn, structural change is the only solution.
It’s not just the VAT
Ignored in the VAT maelstrom is the unfavourable demographics facing the domestic student market over the next decade in the UK. The baby boom of the early 2000s that drove demand for prep school and then senior school places has worked its way through the system. Projections by the Education Policy Institute predict a fall of 430,000 in student numbers to 28/29 and the Department for Education forecasts a fall of a further 380,000 to 32/33. In this perspective, the hysteria around shortage of places in the state sector seems unfounded. Indeed, given the per-capita funding model adopted by the UK government, schools in the state sector are facing the unprecedented challenge of falling student numbers. To put this into perspective, the coming shortfall in UK student numbers is greater than the total number studying at UK private schools.
International students to the rescue?
Will international students come to the rescue? In numbers from the Independent Schools Council there were 25,649 international students attending UK private schools in 2023 – down from a pre covid peak of 29,446. My own feeling is this number will at best flatline. Hong Kong and mainland China, where economic uncertainty overshadows the international student market, are still the most important sources of international students coming to the UK. Hong Kong student numbers spiked with the government immigration scheme and now looks likely to decline. For mainland China the numbers have stayed stable at between 4 and 5,000 a year. Given the economic outlook, the increasing number of alternative destinations in SE Asia and the continued promotion by the Chinese government of their own educational system, I see little evidence of growth.
It is therefore not obvious where the next wave of students will come from. Europe provides reasonable numbers but normally on a short-term basis. Optimism around Japan and Korea is belied by horrible demographics and a history of looking to the US rather than the UK. Numbers from SE Asia remain small with affordability pay issues.
Many schools have been active in the international student market for many years, and I am sure will continue to recruit from their traditional sources to their cultural and financial benefit. That success is based on years of investment, building up strong agent relationships, a supportive alumni network and most importantly a reputation of delivering great outcomes for their students.
For “Newby” schools looking to plug recruitment gaps by simply getting on planes, going to poorly attended trade fairs are unlikely to be successful without a differentiated story to tell. What can you offer and why have you waited until now? What experience do you have with second language students? And the inevitable question – how many students graduate to G5 universities. Agents are having a field day! Having been marginalised in university recruitment their commission rates are exploding for newcomers in the private school sector with high and multi-year commissions being asked for and agreed without any guarantee that they may recommend an alternative school to a student at the end of a key learning period.
Don’t get me wrong. Schools should be looking to international markets to plug the boarding gap, but they have to be realistic. Even if you get your fair share there are still only between 11,000 and 12,000 new students per year to be recruited, divided by over 1,000 interested schools. The cost of getting to those students may end up being greater than you imagined. Most importantly, going international is a long- term investment, not a short-term fix. Looking to develop summer and winter camps, developing partnerships with school groups overseas and building up the additional infrastructure and resources to support the additional needs of the international students are all part of a long-term mix that will strengthen your position.
Going offshore
Establishing international campuses is also becoming a crowded space. We established a partnership with Cranleigh School in China in 2019 and subsequently opened campuses in Changsha and Wuhan and continue to look to expand our network. The partnership has been a success because we knew our market, not just in China but in the specific cities where we opened. We already had a successful international education operation for two decades with all the knowledge and resource that entailed. There are a number of excellent information providers such as ISC Research who conduct detailed analyses about opportunities and the competitive landscape, but the key is execution. Finding a local partner with the skills and experience in education is not easy but crucial to success. For UK schools they must make sure that they have the resources to honour their part of the partnership.
Management structures in British schools
A management structure that can work during periods of comparative calm, when fees outstrip inflation and rising student numbers drive demand does not make it fit for purpose in the structural and cyclical-challenged world schools currently face. Executive heads are busy running the school and are professional educators, not corporate financiers, restructuring experts and education leaders rolled into one. Appointment of education consultants, often ex-heads, may solve part of the problem but they do not typically have the broader financial experience needed to navigate the broader challenges.
Conventional courses to harbour
In the light of the challenges the UK private school sector is witnessing an unprecedented amount of “corporate” activity, with the stronger players looking to expand and the weaker looking for a port in a storm.
Prep schools are already being “acquired” and many more are courting senior school saviours, with the oft-quoted rationale being a useful pipeline of students into the senior school. There is a neatness to the plan but that can quickly turn sour as prep school numbers dry up and losses ensue. What remains is an expensive lead generation and admissions machine. Prep schools, as we have seen, are now entering the sharp end of the demographic downturn. If the Early Years are also seen as an obvious place to economise as part of an ‘all-through’ set up, it is easy to see how many prep schools may be jumping from the frying pan into the fire, particularly during a period when their senior partner has their own problems to grapple with.
And then there is the commercial option for prep schools – of being bought or acquired. The complexity for ‘acquiree schools’ wishing to maintain their charitable status is significant. Governors must do what is in the best interest of the charity, but it is not clear what that means. Is it the highest price? Is it securing the charitable objectives into the future? In a normal sale, shareholders pocket the cash and therefore selling to highest bidder can be seen as being in the best interest of shareholders. Any cash in a transaction is staying in the charity and so the buyer is paying itself to run the school.
The last resort I believe is a third-party sale. If news of a potential sale leaks, parental concerns grow, which then leads to student retention issues and a heightened chance of failure. The only justification seems getting a “fair price,” but what does that mean and who benefits? A privatisation leads to the closure of the charity and the issue of who does what with the money?
A workable alternative
Given the risks of a third-party sale and the challenges of a possibly outdated governance structure, the most sensible way to proceed is to keep the charity in place and outsource the delivery of the education to a separate entity with the skills and experience to operate at a reasonable surplus. In addition to the obvious benefit of reducing disruption it is the most reliable way of ensuring continuity and the ethos of the school, albeit executed in a changed format.
That changed format must recognise the current environment of value for money and a return on investment. Schools must work out how they deliver great student outcomes at a reasonable price. Choice and bundling that have become a way of life in UK independent schools get in the way of delivering on this objective. There is no doubt that parents paying full fees for a child who studies mainstream subjects and enjoys mainstream activities is subsiding those who engage in more peripheral activities. This is simply not sustainable for many schools. A holistic education is the bedrock of a private school education. However, without a detailed knowledge of the cost of providing and revenues from each element of a school education, it is impossible to right-size the offering. Far from diluting the school such an exercise and the implementation of the results provides the basis of sound finance, reduced cross subsidisation to the great benefit of the student body as a whole.
While it may seem very dark now, it is darkest before dawn. If the structural implications of conditions in the UK are faced, there is no reason why a good school of any size cannot head towards the rising sun.
Mark Coggins worked in the financial training industry in London before moving into investment banking where he held a number of senior positions including Head of Asian Equities for HSBC. Subsequently, Mark was, from 2005 to 2012, Chief Executive officer of Kaplan Asia, where he was instrumental in the building of that business into one of Asia’s most successful private higher education providers.
FEATURE IMAGE: by Jasmin on Unsplash
Support images: by Getty Images For Unsplash+ & Jeffrey F Lin on Unsplash
