Three Investment Trends to Track in the Higher Education Market

We kicked off 2024 discussing some reasons for optimism in the education investment landscape going forward. In this edition, we dig deeper into higher education’s outlook and why its uncertainty – shaped by its competing “ups” and “downs” – may be its greatest strength. 

The “ups”: 

• The National Student Clearinghouse’s Fall 2023 report cited a 1.1% enrollment increase, following an additional – albeit still negative – recovery in Fall 2022. 
• High birth rates in 2006 (+3%) may set higher education up for a strong first-year class in 2024, 18 years later. 
• The labor market is still hot but is showing signs of slowing down, healthcare aside. If this trend continues, postsecondary enrollment may be well-positioned for  counter–cyclical climbs – i.e., job availability goes down, enrollment goes up).  
• A rise in online learning provides students with additional affordability, accessibility, and optionality. 
• State-level free 2-year and dual enrollment policies have seen continued growth coming out of the pandemic. 

The “downs”: 

• Declining U.S. birth rates during the Great Recession – and in 9 of the 10 years beyond it – will catch up to higher education’s enrollment beginning in 2026 (i.e., 18 years later), making for smaller potential enrollment pools. This timing poses a risk for investors looking at a 3- to 5-year holding period. 
• Major delays in the Department of Education’s roll–out of the updated FAFSA form have the potential to harm enrollment this coming year. 
• Prospective students are feeling less confident about the value of a degree. 
• ~20% of the ~4,000 degree-granting institutions in the U.S. are facing financial sustainability challenges. 

While higher education’s less plainly optimistic future may have limited dealmaking in 2023 (higher education deal activity down 10%), this uncertainty may provide some additional lift for investment opportunities that help solve (or align with) the challenges that postsecondary education is facing: enrollment contractions, student confidence in value, and institutions’ financial instability.

Navigating enrollment uncertainty 

Recent trends in direct admissions, increased test-optional adoption (followed by some institutions’ switching back to their original testing policies), the Supreme Court’s significant ruling on affirmative action, and approaching demographic shifts leave many higher education admissions and enrollment managers with their work cut out for them. With the enrollment landscape growing more complex, enrollment management, admissions consulting, and lead generation vendors will be in high demand by institutions. Vendors in this segment – including Ruffalo Noel Levitz and Carnegie (the latter receiving an investment from Shamrock Capital in February) – should receive additional tailwinds as the above dynamics continue to play out. 

With the domestic pool of prospective students likely contracting due to shifting demographics, U.S. institutions are also expected to refocus efforts to recruit international students. This trend has already materialized for some institutions; international enrollment at U.S. institutions rebounded 7.5% and 12.4% in AY ’21-’22 and AY ’22-’23, respectively. Now beyond a simple post-pandemic rebound, organizations that are working to support colleges, universities, and international students throughout the enrollment funnel (e.g., Shorelight Education, Quad Learning) find themselves in an especially attractive segment of the broader enrollment management market. 

Enhancing the perceived value of higher education 

Amid recent reports that students are concerned about the value of a college degree and tight technology and professional services job markets limiting employment prospects for recent college graduates, institutions continue their work to improve students’ career readiness. Many are re-aligning their program portfolios, establishing new employer partnerships and work experience initiatives, and exploring new opportunities for stackable micro-credentials. As students continue to question higher education’s ROI and the traditional college-aged population contracts, colleges and universities will continue this work to enhance their students’ skill development and attractiveness to employers. 

With this trend, we should see increased spend and M&A activity in the workforce partnership facilitation and career planning/discovery segments of higher education. Inspirit Capital’s recent acquisition of Wiley Edge, an early-career talent, training, and placement business, Ellucian’s recent acquisition of EduNav, a degree/skill planning and student success solution, and Instructure’s acquisition of Parchment, a leading credential management platform/network, are strong validation points in a space rife with established and emerging early-career and skill development organizations (e.g., Handshake, PeopleGrove, Parker Dewey). 

Continued uptick in institutional M&A 

Recent Tyton newsletters have highlighted why institutional mergers, acquisitions, and affiliations can be a vehicle for mission preservation, why acting early is imperative, and why 2024 may be a year for transformational change in institutional M&A. To avoid the trap of “too little too late,” we expect an increasing number of institutions will merge to combine strengths ahead of the demographic downshift arriving in 2026. A myriad of reasons can bring institutions together, with declining enrollments and rising costs chief among them. No matter the driving force, acting early can make all the difference in finding a successful partnership, preserving the mission and impact of the institution(s). 

As this trend continues to play out, a growing portion of the M&A activity in the broader higher education ecosystem will be designated to colleges and universities themselves rather than traditional investors as a share of overall dealmaking. It might go without saying, however, that institutions may call upon the expertise of investors and bankers in identifying, approaching, and negotiating with partners when navigating affiliation processes. While there may not be as direct of an equity opportunity involved in this segment of M&A for more traditional investors when compared to the other two trends highlighted, opportunity may exist for some to help support colleges and universities in navigating merger and/or partnership processes.

Overall, institutions’ and companies’ efforts to adapt their strategies to ensure short- and long-term sustainability in an uncertain enrollment landscape makes the space ripe for continued (re-)investment. Whether institution, company, or investor, reach out to us as Tyton Partners can help support you in building the future of the higher education marketplace.