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Published in Print: May 22, 2002, as Businesses Flock To Charter Frontier

Businesses Flock To Charter Frontier

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National Heritage Academies Inc. doesn't hand out desktop computers to the families at its charter schools, or laptops to its teachers.

Its executive suite in Grand Rapids, Mich., isn't staffed by a former Ivy League university president, a former White House lawyer, or a famous media entrepreneur, as is the case at the industry leader, Edison Schools Inc.

But while Edison, the New York City-based company whose educational program does include free computers, has lost hundreds of millions of dollars and fallen out of favor with investors, National Heritage last year turned a small profit managing more than two dozen charter schools. It is believed to be one of the nation's first charter-management companies of significant size to become profitable.

Changed by Charters: Part 3
> Businesses Flock to Charter Frontier
Charters in Some Cities Attract Students From Catholic Schools
Millionaire Industrialist Touts 'White Hat' Firm to Build Charter Model
Series Home

"Last year, we broke through with our first year of marginal profitability," said Peter G. Ruppert, the president of National Heritage. "We are far from highly profitable, but this year it will be up over last year."

Charter schools started out on the theory that anyone with a promising educational idea could open a school with public money, but with fewer of the regulations governing the traditional system. But entrepreneurs quickly realized there were business opportunities in charters: Harried teachers or community activists running schools for the first time would need help with the managerial side of the enterprise, and many would elect to hire companies to run every aspect of their schools.

And it isn't only education management organizations, or EMOs, that have come to view charter schools as a ripe market. Numerous consultants offer to help charter holders with such tasks as grant-proposal writing, recordkeeping, and other "back office" needs. Some school supply companies and curriculum providers have tailored their businesses to target charter schools more than other education markets. Traditional textbook publishers, testing companies, and other education businesses have paid attention, too.

"There has been tremendous growth in the number of charter schools in the last 10 years," said James P. McVety, an analyst with EduVentures Inc., a Boston research company that specializes in the education industry. "There is a big opportunity to serve that market."

Estimates vary on the proportion of the nation's 2,400 charter schools that are run by for- profit companies. The Center for Education Reform, a Washington-based organization that is strongly pro-charter, says that 10 percent of the independent public schools are company-run. Some reports suggest the figure is higher, possibly as much as 20 percent.

In the newest angle on the charter school business, some sizable companies are getting involved in "cyber charters," or virtual charter schools, which are typically organized around an online curriculum and often target home school families. Such schools don't have to spend anything on buildings, a major expense for more traditional charter schools, yet still receive the same per-pupil funding from the state.

Clearly, the for-profit education management industry has emerged as one of several sectors of the education landscape to be altered by the new competition, choices, and opportunities presented by the charter school movement. Others include teachers' unions, public school districts, and religious schools. ("Unions Turn Cold Shoulder on Charters," March 27, 2002 and "Dayton Feels the Heat From Charter Schools," April 24, 2002.

Private Investment

The first charter school opened a decade ago in Minnesota. The growth of such schools during the 1990s coincided with the rise of a new education industry built around private management of public schools, Internet learning, and a boom in specialized services such as tutoring and test preparation.

But while charters continue to grow, the education industry has hit several roadblocks in the past two years. First, the general downturn in the economy and the stock markets meant that venture capital dried up for new education ideas. And in the education management niche, several well-known companies struggled with tight finances, leading to consolidation among top providers.

Last year, Mosaica Education Inc., of New York City acquired Boston-based Advantage Schools Inc. Early this year, Chancellor Academies Inc., acquired Beacon Education Management Inc.

Edison Schools, the only publicly traded company that manages a significant number of charter schools and the nation's leading education management business, has its own set of problems that have only gotten worse in recent weeks. ("Edison Reels Amid Flurry of Bad News.")

Still, few observers are willing to bet that business involvement in charter schools is on the wane.

"Charters have become a major force on the landscape of public education, and the opportunity to provide services and solutions to this market is still very bright," said Michael T. Moe, a longtime observer of the education industry and a partner in the San Francisco office of ThinkEquity Partners.

Next month, the Minneapolis-based investment firm is sponsoring an investment conference in New York City focused on opportunities in the "site- based education market." The conference will offer presentations from several school management companies, including Edison, National Heritage, Fort Lauderdale, Fla.-based Charter Schools USA, and the newly merged Chancellor Beacon Academies. While the conference will also have presentations from other sectors of the education industry, ThinkEquity Partners said last week that there was intense interest from institutional investors in attending.

"Clearly, the management of the schools themselves represents a substantial opportunity, but there is a vibrant constituency for other kinds of providers, such as consulting, back-office services, and technology," Mr. Moe said. "We're still kind of in the second inning of a nine-inning ballgame."

When Chancellor Academies merged with Beacon Education Management early this year, the new business became the country's largest manager of charter schools, and second only to Edison in the total number of public schools managed. Many of Edison's schools are not charters, but are operated under direct contract with school districts.

The new Chancellor Beacon Academies Inc. even got a $26 million infusion of venture capital at a time when such private-equity dollars have been hard to come by because of the general state of the economy. The capital came from the venture arms of two major investment companies, Warburg Pincus and Goldman Sachs.

"I think there are going to be charter opportunities for a long time to come," said Octavio J. Visiedo, the chairman of Coconut Grove, Fla.-based Chancellor Beacon and a former superintendent of the Miami-Dade County school district.

"We get calls from across the country from individuals who have run charter schools but are now interested in contracting with a company," he added. "They are finding out it is hard work and there are some very complex issues to deal with."

Finding Their Niche

Most of the top charter-management companies offer a sort of full-service package that includes administration, curriculum, and other services. But smaller companies have carved out another niche in the school management area by offering a menu of services a la carte for charter operators looking only for help with bookkeeping, insurance, facilities, and other back-office tasks.

One of the larger providers of those services is ABS School Services LLC of Phoenix. The company has thrived in the freewheeling Arizona charter school market by offering everything from payroll and accounting services to grant-proposal writing.

"We have over 100 charter schools for which we do business and accounting services," said Thomas M. Frye, a senior vice president at ABS. The company also has close ties with several financial institutions that help charters with the always daunting task of securing real estate and school facilities.

The company started about 10 years ago, when its initials stood for Arizona Benefits Solutions, Mr. Frye said. Now they stand for America's Best Schools, and the company is moving toward offering total charter management.

Most charter-management companies have yet to go public in the stock market, but they remain hopeful that they will reach the size and profitability to entice Wall Street.

Meanwhile, critics of private management have been sharpening their rhetoric.

"To a certain extent, charter schools have become like The Picture of Dorian Gray," said Alex Molnar, the director of the Education Policy Research Unit at Arizona State University in Tempe. "The public was sold this beautiful, vibrant picture of charter schools as bastions of innovation and creativity, empowered teachers, and responsive classrooms.

"But up in the attic is the shabby portrait of a reform that has pretty much become a shell game for the for-profit education sector," continued Mr. Molnar, whose research team publishes an annual examination of education management companies.

Mr. Molnar argued that charter schools have all the inefficiencies of traditional public schools—and possibly more, given that they have to start their operations from scratch—but with virtually none of the accountability. Charter holders hire management companies, which then run the schools as they see fit and largely outside of public scrutiny, he said.

The latest new opportunity for charter business is in cyberspace. Among the companies pursuing contracts for "virtual" charter schools are K12 Inc., the McLean, Va.-based online-learning venture started by former U.S. Secretary of Education William J. Bennett, and Sylvan Ventures, the investment affiliate of the tutoring giant Sylvan Learning Systems Inc. of Baltimore. In addition, one fast-growing brick-and-mortar charter company, White Hat Ventures LLC of Akron, Ohio, already operates an online charter school in that state. (See related story, Page 1.)

School districts in Ohio that are losing students, and per-pupil funding, to virtual charter schools run by for-profit managers are talking about creating their own network of cyber charters that would appeal to home schooling families in their areas—and keep state money coming into district coffers.

Fierce policy debates and legal fights are cropping up over online charter schools run by for-profit companies in several states, including North Carolina, Ohio, and Pennsylvania. Among the points of contention is whether cyber charters deserve the same per-pupil funding as their brick-and-mortar counterparts.

"Under this, you have schools without having to have any schools," said Mr. Molnar of Arizona State. "But they want to be paid just like it is a physical school."

Moral Lessons

At National Heritage Academies, bricks and mortar are very much part of the business plan. In fact, the Michigan company is noted for its cookie-cutter school building design, which consists of simple frame buildings without many extras.

"We build very bright, learning-conducive buildings, but they are not Taj Mahals by any means," said Mr. Ruppert, the president of National Heritage.

The company is privately owned, so it is not required to report the details of its finances, but its revenues have grown quickly. National Heritage's revenue jumped from $5.5 million in 1996-97, when it served 1,000 students in four schools, to $77.8 million in 2000-01, when it served 11,400 students in 27 schools. This school year, with nearly 14,000 students in 28 charter schools, the company expects revenues to exceed $100 million.

The company would not disclose its profit, but most observers accept that it is the first major charter-management company to end up in the black.

"National Heritage is not in a race to be number one in size," Mr. McVety of EduVentures said. "It has focused more on creating profitability around its existing school network."

The company was founded by J.C. Huizenga, a cousin of onetime Blockbuster Video owner H. Wayne Huizenga. Early on, the company was noted for its reliance on relatively low- paid teachers from Christian colleges and its devotion to moral instruction that some critics viewed as crossing the line of separation between church and state.

In 2000, a federal judge dismissed a lawsuit that challenged such practices as parents' meeting for Bible study in National Heritage parent rooms. Regardless of whether the schools skirt the church-state line, their hallmark is a strong back-to-basics focus, with the Core Knowledge curriculum as one foundation.

"We're teaching universal human virtues that are not religious at all—justice, temperance, fortitude," Mr. Ruppert said.

Gary Miron, the principal research associate at the Evaluation Center at Western Michigan University in Kalamazoo, has studied charter schools in Michigan for years. A new book he co-wrote, What's Public About Charter Schools?, examines the role of education management organizations.

'Fascinating Model'

National Heritage "has a fascinating model that is streamlined for profit," Mr. Miron said in an interview. In contrast to some management companies that have been willing to go into the poorest urban schools, National Heritage concentrates on affluent suburbs where students are already performing well, he contends.

And in sharp contrast to the idea that charter holders are simply looking for management help, Mr. Miron argues that National Heritage and other companies increasingly decide where they would like to open a school, then go recruit community members to form a board that applies for a charter.

As for student achievement, National Heritage cites a study showing that students who attended its schools for two years scored 27 percent higher than state averages on Michigan's state tests. But Mr. Miron argues in his book that charters run by management companies in Michigan, including National Heritage, performed worse than other charter schools in all but one subject and grade tested by the state.

National Heritage hopes to expand by four more schools this coming fall. It already has grown from its base in Michigan to open schools in New York state and North Carolina, and it is hoping to add Ohio, Indiana, and Delaware in the near term.

"Our vision is to some day have 200 schools," Mr. Ruppert said. "More than 85 percent of charters are run by folks without a management company. That alone says there is still a huge opportunity."

Vol. 21, Issue 37, Pages 1,12,15

Web Resources
  • "Making Schools More Efficient," May 20, 2002, from BusinessWeek Online looks at measuring productivity in public education. "By comparing test scores in areas with and without choice," the article notes, "Harvard University economist Caroline M. Hoxby concludes that competition makes public schools more productive. She calculates that the productivity of American schools would rise 28% if all metro areas had ample inter-district competition and many private schools."
  • "What Is the Education Industry?," a report from on the for-profit education sector, "identifies and defines four industry sectors—schools, products, services and e-services—and provides a framework to assist individuals and organizations involved in the education marketplace."
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