Private Equity, Epstein’s Funding Source, and . . . Education?

Readers of the New York Times or Wall Street Journal likely saw the developing story about private equity owners and ties to Jeffrey Epstein. As described yesterday in the NYT:

The founders of Apollo Global Management, one of the world’s biggest private equity firms, engaged in a brief power struggle this weekend over control of the firm, a rift that opened up after an inquiry revealed that one founder — Apollo’s chief executive and chairman, Leon Black — had paid more than $150 million to the convicted sex offender Jeffrey Epstein.

On Monday, Mr. Black announced his plan to step down as chief executive this year. “I have advised the Apollo board that I will retire as C.E.O. on or before my 70th birthday in July and remain as chairman,” he said in a statement.

The article is worth reading in full, but the gist is that NY Times reporter Matthew Goldstein uncovered this problematic connection – starting with this October article – that forced Apollo to launch an independent investigation and ultimately led to Black’s slow-motion resignation.

Mr. Black’s payments effectively bankrolled the lifestyle of Mr. Epstein — whom Mr. Black viewed as a “confirmed bachelor with eclectic tastes,” according to the report — in the years after his 2008 guilty plea in Florida to a prostitution charge involving a teenage girl.

The independent report showed no direct involvement between Epstein and Apollo – the payments were personally from Leon Black – but this news has shaken the finance community and could have significant impacts on Apollo’s operations. It is worth noting that the boardroom dispute centers on Black’s attempts to minimize the damage. Stepping down in July and remaining Chairman of the board seems a token gesture to deflect attention from the media and resultant client pushback.

Education Connections

Why am I writing about this story? It turns out that Apollo Global Management has some significant ties to the education community.

Many of Apollo’s biggest clients — including major pension funds, charitable foundations and sovereign wealth funds — had been awaiting the results of the report.

The $63 billion Pennsylvania Public School Employees’ Retirement System had said it would not invest any additional money with Apollo until the review was complete. CalPERS — the California Public Employees’ Retirement System, one of Apollo’s biggest clients — had said it expected its outside investment managers to follow the fund’s own values. Other pension funds — in Texas, Illinois and Ontario — also said they would be watching the investigation closely.

In his three-page letter to investors on Monday, Mr. Black acknowledged that “heightened media scrutiny of Apollo has generated unwelcome attention” for those investors. “I personally regret any distraction that may have caused,” he wrote. Mr. Black said Apollo had hired a law firm, WilmerHale, to look into its reputational risk management practices and suggest improvements.

Apollo’s ties to education go beyond pension funds, as the company’s Private Equity practice owns both McGraw-Hill Education and the University of Phoenix.

McGraw-Hill Education

Apollo completed its acquisition of McGraw-Hill Education in 2013 and previously owned significant debt holdings in Cengage Learning. I noted in my coverage that Apollo specializes in distressed acquisitions – companies facing an uncertain future. Shortly after the 2013 acquisition, McGraw-Hill started moving aggressively into the digital space while taking on significant debt, as reported by PitchBook:

It didn’t take long for Apollo, which reportedly supplied $950 million in equity to fund the deal, to begin its financial maneuvering. A year after the takeover was complete, McGraw-Hill took on a new $688 million term loan, and nine months later, the company issued a $100 million dividend, per Moody’s. In 2016, Apollo and McGraw-Hill teamed up on what was reportedly the largest dividend recapitalization of the year, taking on a $1.6 billion term loan in order to distribute $300 million, again per Moody’s. [snip]

Firm and company were also busy on another front, conducting several add-ons between 2013 and 2016. Just three months after Apollo bought McGraw-Hill, they added on ALEKS, a maker of adaptive learning technology for both K-12 and higher education. In early 2014, McGraw-Hill acquired Engrade, the developer of a digital platform for K-12. And in 2016, the company bought Redbird Advanced Learning, yet another builder of education software.

Those deals reflect a shift in the company’s priorities, away from traditional publishing and toward tech. Overall, the company spent some $700 million on software between 2013 and early 2017, per The Telegraph.

McGraw-Hill Education and Cengage Learning (owned by private equity firms Apax, KKR, and Searchlight Capital) attempted to merge in 2019, but the deal fell apart in 2020.

The University of Phoenix

In 2017 Apollo completed its acquisition of the University of Phoenix. I noted in early 2016 when the initial news came out that the University of Phoenix was still the largest institution in the US, although it was far from its peak enrollment from 2010.

The University of Phoenix has continued its enrollment decline, reporting just over 105,000 students as of Fall 2018 (per the latest IPEDS fall enrollment data).

Ownership Matters

I have long argued that it is important to understand the ownership of education companies, whether for-profit or nonprofit institutions, publishers, or EdTech vendors. Apollo’s two major education acquisitions have had a big impact on digital publishing and EdTech already, and their attempts to turn around these companies are also significant. The current news of the turmoil at Apollo Global Management is also an education story worth watching.