Mark DeFusco has a new gig, and it may speak volumes about the evolving higher-education landscape and the fate of financially struggling private colleges.
Until a few months ago, Mr. DeFusco was working with major investors on plans to buy and bundle up ailing regionally accredited colleges. Now, believing that the once-friendly climate for such nonprofit conversions has grown chilly, he’s shifted gears. Instead of buying up troubled colleges, he’s going to work with two veteran academics at the University of Southern California to form a consultancy focused on saving them.
“I’ve been very busy these last five years telling for-profit businesses what’s valuable” about themselves, says Mr. DeFusco. The goal of the consultancy is to help nonprofits capitalize on their most valuable traits, too.
“We don’t want to see potentially good assets fail,” says Mr. DeFusco of the new venture, which will be run out of Southern Cal’s Center for Higher Education Policy Analysis and headed by Mr. DeFusco and the professors Guilbert C. Hentschke and William G. Tierney.
Considering how Mr. DeFusco has been in the thick of the education industry’s most important trends for two decades, this latest move is worth watching.
Mr. DeFusco, 51, is a veteran of the for-profit-college industry. For the past five years, he’s been a deal maker with Berkery Noyes, an investment bank that handles many mergers and acquisitions of education and information companies that often don’t get publicized. From 2002 to 2005, as a new wave of private-equity investors came onto the scene, he was president of Vatterott College, a privately held institution based in St. Louis. He was a top manager at the University of Phoenix for 10 years before that, at a time when it was broadening its footprint and becoming the national powerhouse it is today.
Voluble and refreshingly unslick, Mr. DeFusco was the guy on the PBS Frontline documentary College Inc. who, with just a little coaxing, memorably discussed how “very, very well” he and his University of Phoenix colleagues made out financially as the university expanded. “I did better than I ever imagined,” he said on the show.
Until a few months ago, he thought he might have found another gold mine of a business, one that would be not only lucrative for him and his enthusiastic investors, but also, he says, beneficial to higher education writ large.
His plan was to form an investor-backed “roll-up"—a company comprising several small nonprofit colleges that it would buy, and then continue to operate, but with a single back-office operation for administrative functions.
“You could really have efficiencies” without each college having its own bursar, its own registrar, he says, replaying a theme that many higher-education reformers before him have espoused.
It wasn’t a pipe dream, he says. Working with a colleague with years of experience at Catholic colleges, Jack P. Calareso, president of Anna Maria College, he had identified 25 Catholic colleges, with enrollments ranging in size from 400 to 3,000, as acquisition targets.
“I wanted to get to them before they got onto your list,” he says, referring to the list published in The Chronicle last year citing the 100-plus nonprofit colleges that had failed the Department of Education’s financial-responsibility test.
On Second Thought
Two East Coast private-equity investors, he says, “committed more resources than I could spend"—about $500-million over four years. And he says they weren’t the sort of investors looking for a fast buck. (The investors asked him not to reveal their identities; Mr. Calareso, who sat in on some of the meetings with investors and colleges, confirmed the details of the venture in an interview.)
The idea, Mr. DeFusco says, was to operate the colleges with “a portfolio view,” taking advantage of their strengths and economies of scale on things like marketing and student recruiting, keeping their Catholic mission, investing in new programs and facilities where it made sense, and eventually scrapping some programs that underperformed.
“I really wanted to get into heaven,” he says. And the moves might have helped keep some traditional colleges alive, along with the values they perpetuate. “When my kids go to college, I hope there is still tenure and there’s still academic freedom.”
Mr. DeFusco says he had support from two bishops and actually had in hand three letters of intent from colleges willing to be acquired. (He wouldn’t name them.) Then his lawyers advised him in early spring that the Higher Learning Commission of the North Central Association of Colleges and Schools, a regional accreditor that had been known for allowing such conversions over the past five years, had begun to take a tougher line. Eighteen of his 25 targets were in that accreditors’ region.
The Higher Learning Commission rejected the conversion of nonprofit Dana College in July and of Rochester College in February, based on new policies it adopted in June 2009 and toughened in February.
Mr. DeFusco says he got the message. Before that commission approves another conversion, he believes, “it’s going to be a couple of years—guaranteed.”
Sylvia Manning, president of the commission since June 2008, says the new policy does not ban nonprofit-to-for-profit conversions—in fact the continued reaccreditation of two converted institutions, Waldorf College in January and the College of Santa Fe in October, came after the policy was adopted in June.
It was under her predecessor Steven D. Crow that institutions including the American College of Education (formerly Barat College), Grand Canyon University, and Ashford University (formerly the Franciscan University of the Prairies) were acquired by companies and allowed to significantly shift their emphasis to online education while keeping their accreditation.
She allows that in general, the new policy creates a much higher bar than what existed under her predecessor.
“It’s quite possible people are reading this and are saying, ‘Oh my God,’” Ms. Manning says, The new standards are not intended to block purchases or keep new owners from introducing new styles of management and curricula to the institutions they’re acquiring, she says. “We’re not saying you can’t change them,” she says of the colleges. But for colleges’ accreditation to transfer upon a sale, “you can’t transform them.”
Ms. Manning says she never spoke with Mr. DeFusco and declined to comment on his assessment of her commission’s stance, or of his sense that other regional accreditors are following suit. “My guess is that he’s doing his own reading of tea leaves,” says Ms. Manning.
A New Deal
Mr. DeFusco says many of the forces that would have made his roll-up venture a success lead him to believe that his shift in gears toward a hands-on consulting project focused on struggling colleges will also keep him very busy, albeit probably with a smaller payday.
“A lot of schools are in trouble,” says Mr. DeFusco. In the course of his research for his new venture, he and his team estimated that 15 to 45 colleges could fail each year for the next five years.
Too many colleges are discounting their tuition too heavily in pursuit of students, needlessly holding onto underutilized property that could better used to raise capital (“In this climate, those buildings are an anchor that drown you,” he says), and maintaining administrative functions that could be better handled through outsourcing or collaboration.
Worse, he says, many boards of trustees are unaware of the severity of their institutions’ problems. If you were on the board of a for-profit company operating like that, “you’d be sued,” he says.
A tad less bluntly, Southern Cal’s Mr. Tierney, a professor of higher education, echoes much of Mr. DeFusco’s concern about the prospects for higher education, especially in the near term. “Some of us are getting very sober about a rebound,” he says. The policy-analysis center has had a long interest in business-focused approaches and the role of markets in higher education. Mr. Tierney and Mr. Hentschke have written or co-edited two books on for-profit colleges.
So the idea of teaming up with Mr. DeFusco (who himself received a Ph.D. from Southern Cal) to work as turnaround consultants and help some colleges “stop the bleeding” was appealing, says Mr. Tierney. This month Mr. DeFusco will join the university as a senior research associate at the center.
Although there is no shortage of consultants already mining this territory—Bain, Huron, the Education Advisory Board, and advisers organized by the Association of Governing Boards, to name just a few—Mr. Tierney says the combination of Mr. DeFusco’s business experience and his and Mr. Hentschke’s understanding of academic culture and the role of shared governance gives their venture a niche. Also, he notes, it may be the first such higher-education consulting group to operate from within a university.
The consultants will help with short-term strategies, governance, and operational audits. They will also offer “workout” expertise; workout is the term used when companies go out of business. As a university effort, the consultancy can also call upon the expertise of other academics in the School of Education and the rest of the university. The consulting entity will pay a portion of its earnings as overhead to Southern Cal in return for administrative support.
Mr. Tierney says he hopes to begin signing up clients by Labor Day. “If nobody calls by January 1, well, then this was an interesting idea.”
It all seems pretty fast-paced to Mr. Tierney. But that’s been a lesson in itself for Mr. DeFusco, as he prepares to immerse himself more directly in traditional academe. “August off?” he responded incredulously when Mr. Tierney told him the schedule. August is when colleges are sweating the most over whether enough students will show up to cover the budget. “This is your most important month,” he says.
For higher education, this new gig may or may not be a bellwether. For Mr. DeFusco, it will certainly require some adjusting.
