How One Firm Warmed the Frozen Offering Market and Earned 17.1x In The Process

As promised, I spoke with Phil Clough of ABS Capital Partners on his firm’s blockbuster, crisis-defying exit. By blockbuster I mean a 17.5x return. By crisis-defying I mean IPO in the coldest offering climate in the past five years.

Let’s back up and look at what happened before asking how. In 2000, the Baltimore-based middle market buyout firm paid $10 million for American Public Education Group, an online higher education business that serves the military, police and fire department communities. The deal valued the company at $20 million

In 2005, the firm invested $8 million more as it watched its investment and the online learning industry at large grow exponentially. That deal valued the company at $50 million. In 2007, with the company growing at a 70% clip, American Public Education went public and ABS made three times its money ($54 million). It only goes up from there.

In February the stock was at $35.50 per share and ABS did a follow-on offering for another 4.5x its investment (81 million). The firm earned another 1x its money ($18 million) during a distribution for technical reasons in November. This week sold off the rest. The offering was priced at $37.50 per share, doubling its previous return and finishing the investment off with a smart 17.1x its money on the investment.

So how did ABS do it? For starters, it was a smart play. Online education companies are growing rapidly, and American Public Education Group had an established name and strong word of mouth buzz from communities of students in the military. That connection proved to be essential, since most online educators struggle with marketing and recruitment costs. But this company has very little marketing costs thanks to word of mouth, Clough said. The model is perfect for students in the military since they often have erratic schedules and the school’s culture is accepting of those factors.

ABS said attaining regional accreditation was essential to the company’s development as well. Regional accreditation lends credibility to online educators, and with ABS’ backing the company gained that status in 2006.

Clough attributed the market’s enthusiasm about American Public Education to the lack of pure play online education companies, the growth in the sector, and the counter cyclical nature of education companies (high unemployment leads to higher enrollment in schools). He said the company’s mastery of a niche market and low cost of acquiring students adds to the stock’s appeal.

I asked Clough about his firm’s fundraising plans, as outlined in a previous story, but he declined to comment.

Previously:

ABS Capital Partners Nearing Close On Sixth Fund

ABS Scores 17x Return on American Public Education