Following my post this morning on ABS Capital’s partial exit of Rosetta Stone, I spoke with Phil Clough of ABS Capital. He said private equity activity in the education sector, which has proven to be wildly successful for his firm, is getting a bit overheated.
It’s a curious thing to say; Rosetta Stone’s debut traded up more than 40% today, and Bridgepoint Education, another for-profit education company backed by Warburg Pincus, traded up in its debut this week as well. The pair of IPOs are the first PE-backed offerings of the year and mark the first time the markets have seen two IPOs in one week in 11 months. (For context, Thomson Reuters has published a chart showing there was an average of 3.9 IPOs per week in 2007.)
And it’s not ABS Capital’s first success in the sector. The firm made a killing on its offerings of American Public Education, which it floated for 17.1x its money in December. Prior to that, the firm made 2x its money selling CourseAdvisor Inc. to Washington Post after owning it for only a year. And as I reported earlier, ABS Capital is poised to make 6x its money on Rosetta Stone based on a $25 per share stock price.
Even so, Clough said finding another home-run education deal in this market wouldn’t be as easy. “There’s been a number of successful exits in the education industry and it’s very well known. The sector gets a lot of interest from private equity and has for awhile, so I think the ability to get something done at an attractive valuation is an issue,” he said.
Still, he said ABS Capital remains interested in the sector, speaking with targets. But since there are very few barriers to entry in the space, its very entrepreneurial and it can be difficult to distinguish which opportunities “have real substance and legs to them,” he said. The rest of our interview is below.
So what’s the trick-what qualities do you look for?
Like anything else we’re looking for something that’s highly differentiated in a way that’s sustainable. In the case of CourseAdvisors, there was some pretty proprietary technology. With American Public Education, the business developer had to a market strategy that was perfect for the military and they were able to take market share from others. With Rosetta Stone, the company had some valuable intellectual property, methodology , and content. Now, its size gives it some competitive advantage with the ability to advertise. Each one had a sustainable differentiator.
Number two is, “Do you have a scalable business model?” Online businesses clearly are very favorable. That was the business model and at Rosetta Stone and what made it attractive to us.
What did you bring to the table as investors in the company?
Well, at the time we met the company, they had a number of strategic offers on the table. The founder of the business had passed away approximately a year or so before we met them. Tom Adams became the CEO, and when we met with tom, there was an opportunity to build a bigger business. He went to the shareholders, and they approved of a management bid for the company with ABS and Norwest as backers.
He saw a much bigger opportunity for the company. At the time it was a $20 million company. He saw us as a firm that had been involved with a lot of IPOs. We take many of our companies public. (Sidenote: around 30% of the firm’s companies go public, which is pretty high for a middle market investor like ABS Capital.) Tom had that as a goal almost from the beginning. Our involvement was everything from helping him assemble a board of directors and mgmt team to being intimately involved as he led the discussions of business strategy and growth strategy.
About the IPO. Did you ever think, maybe this was the wrong time to take a company public?
Clearly the Q4 of last year was rough. We wouldn’t have been ready that much before now anyway. It’s been our experience that good companies can get public even in tough markets. Obviously got some good advice from the banking team about when specifically we should go for it. We never dramatically delayed, but if the environment had been like it was in December or January, we probably would have also waited.
What fund did this exit return money to?
Fund four, which was raised in 2000.
In December we reported the firm was nearing a close on its $400 million sixth fund. How’s that going?
We’re pretty much at the target. I can’t say much beyond that.
ABS Capital Nears Close On Sixth Fund
How One Firm Warmed the Frozen Offering Market and Earned 17.1x In The Process
ABS Capital Partners Nearing Close On Sixth Fund
ABS Scores 17x Return on American Public Education