With the reputation of U.S. for-profit colleges in tatters, one company has found a convenient way to circumvent regulation in this country: by operating primarily in overseas markets.

Baltimore-based Laureate Education, the world's largest for-profit higher-education company by enrollment (with about 1 million students now enrolled worldwide), operates in a sector plagued by government scrutiny in the U.S. and in which one major for-profit education company, Corinthian Colleges, declared bankruptcy earlier this year.

College students on a campus in Brazil. William Perugin | Getty Images

But Laureate gets 84 percent of its revenue from outside this country, most of it from Latin America. There, nations lack the infrastructure of established universities that the U.S. has, and their development means a steady demand for educated workers and training, the company argues in its IPO paperwork. (It filed for an IPO in October, but IPO watchdogs don't expect the deal to occur until next year.)

"The world embraces the power and importance of education and is seeking new ideas and technologies to deliver better education to more people at an affordable cost," Laureate founder and CEO Douglas L. Becker wrote in a letter in Laureate's IPO prospectus in the fall. "We believe we are uniquely positioned to meet this need through our unparalleled scale and resources, and our growing capacity to provide our intellectual property and services to other universities and governments."



Meeting the international demand

Laureate's prospectus points to a rapidly expanding middle class abroad, particularly in developing countries, global increases in service and technical industries and a growing realization that higher education opens doors for students and spurs economic growth. Worldwide, the number of students in higher-education institutions nearly doubled from 99.7 million in 2000 to 198.6 million in 2013, with about 90 percent of those students in countries outside the U.S., according to the United Nations Educational, Scientific and Cultural Organization. In Latin America, Asia and other developing regions, Laureate predicts the demand for higher education will continue to grow, and many governments are striving to increase college enrollment. The company notes the demand for low-cost higher education far outstrips the supply in such places as Latin America, where higher education has traditionally been the purview of Catholic colleges and state-run universities, which are cheap or free but have limited spots for students.

But can Laureate succeed in staking its future outside the U.S. borders, where all but six of its 88 schools operate? The company has not been without detractors: It faced heavy criticism in Chile and Brazil, leading to the loss of accreditation for one of its Chilean schools last year. And critics of Laureate's Walden University in Minnesota claimed professors were inaccessible and that continual delays stretched out the time — and thus money needed — to earn an advanced degree. Three students have filed a lawsuit against Walden, hoping to make it a class-action suit, alleging breach of contract, unjust enrichment, violations of state consumer protection and unfair competition laws.

In October, U.S. District Court Judge Marvin J. Garvis in Maryland dismissed four of the counts from the plaintiffs alleging breach of state consumer protection laws. The plaintiffs are seeking tuition refunds, payment of loan debt incurred while attending Walden and litigation costs. In its prospectus, Laureate says: "We believe the claims in this case are without merit and intend to defend vigorously against the allegations." In August 2013, a group of current and former students filed a lawsuit against Laureate's University of St. Augustine for Health Sciences, but it related to matters arising before Laureate acquired the institution in November 2013. Additional complaints containing similar allegations were also filed in March 2015 and April 2015, according to its IPO prospectus, which states that these claims are without merit and that the company intends to defend itself vigorously. "We expect to be indemnified by the seller for substantially all of the liability with respect to any claims in this case," the IPO document says.

Grading the largest for-profit ed stocks

Company YTD return Annual revenue Grand Canyon Education negative 18% $691M DeVry Education negative 50% $1.9B Apollo Education negative 78% $2.7B Strayer Education negative 23% $446M American Public Education negative 43% $350M

(Note to chart: revenue is for most recent fiscal year or calendar year, depending on how reported by each company.) As Laureate's Becker attempts an initial public offering, which would reverse a 2007 leveraged buyout led by KKR & Co., he has to convince the market how his company differs from the rest of the for-profit education industry. The industry has lost 42 percent of its value in the past year, according to Motif Investing data, amid mounting complaints about student loan defaults and courses of study that didn't help students get the jobs they wanted. It won't be easy. Laureate has seen results in its bottom line: Revenue last year rose 13 percent to $4.41 billion, with a loss of $162.5 million driven completely by $385.8 million in interest payments on its $4.33 billion of long-term debt. The debt is left over from the 2007 deal that took Laureate private, as well as from acquisitions of universities and colleges. Laureate, like many leveraged-buyout companies, isn't profitable. It has posted a net lost for the past three years (and every year going back to 2010), based on formal accounting standards. Based on EBITDA (earnings before interest, taxes, depreciation and amortization), Laureate has posted profits, including a $754.2 million profit for the 12 months ending in June. Laureate's backers are a who's who of the top ranks of capitalism, drawn to the idea of finding new, more efficient methods of schooling and professional training, particularly in emerging markets. Private-equity mogul Henry Kravis, George Soros and Point72 Asset Management's (formerly S.A.C. Capital) Steve Cohen, all have invested in the company, according to Bloomberg. Former U.S. President Bill Clinton served as honorary chancellor of Laureate's colleges and universities, collecting more than $16 million for his work and the reflected glow of his popularity, until his wife, Hillary Clinton, began her White House run.

The criticism of Laureate, here and abroad, is similar to charges leveled at competitors from Apollo Education Group, owner of the University of Phoenix, to the now-bankrupt Corinthian Colleges. In April, Corinthian shut down after a series of investigations by federal agencies and state attorneys general.

Both at its U.S. and foreign schools, critics say, Laureate puts too much emphasis on marketing, advertising, executive salaries and recruitment of students and too little on quality education. "At both public and private [nonprofit] institutions, we're based on quality — how highly ranked our program is, how good our faculty are," said Andrew Ainslie, a critic of for-profit schools who is dean of the Simon Business School at the University of Rochester.

He said generating that quality demands in-person instruction and small classes, and that's very expensive. "You need a highly educated person in the classroom, with reasonably small numbers of people, in order to really produce a quality product, and it's incredibly hard to do that in a way that makes a profit," Ainslie said.



As Laureate has bought universities, it has sometimes followed up by cutting faculty and staff and trying to boost enrollment through telemarketing and advertising. It has grown from about 245,000 students eight years ago and has come under fire in Latin America as it grows there, Bloomberg News reported from Brazil.



Ready to blunt the criticism

After Laureate took over Centro Universitario IBMR in 2010, the school's quality ranking among small colleges in Brazil plunged from 41st place to No. 132, the Brazilian government's National Institute of Studies and Educational Research says. Last year the Rio State Legislature criticized for-profit colleges for firing professors and cited Laureate's takeover of IBMR. Elsewhere in Latin America, where Laureate takes in about two-thirds of its revenue, the company's Laureate International Universities failed last year in its appeal of Chile's National Accreditation Commission's decision to strip it of accreditation for the Santiago-based Universidad de Las Americas. The commission pointed to low graduation rates, a sharp increase in student enrollment without faculty numbers keeping pace and low faculty salaries. Speaking of Laureate executives, Ainslie said: "They're compensated for revenue and getting students through the door. They're compensated purely for quantity."

You need a highly educated person in the classroom, with reasonably small numbers of people, in order to really produce a quality product, and it's incredibly hard to do that in a way that makes a profit. Andrew Ainslie dean of the Simon Business School at the University of Rochester

A Laureate spokesperson declined to comment on specifics about the schools in Chile and Brazil, citing the impending IPO, but noted the student body at IBMR represented less than 5 percent of the 265,000 students at Laureate schools in Brazil. In its IPO, Laureate appears ready to blunt criticism far and near, both by acknowledging the criticism and vowing to deliver quality education at low cost to students who wouldn't be able to go to college otherwise. "It seems as if they anticipate all the attacks that they're going to receive on the kind of bad impression people probably have about this company going into it, and they're trying to differentiate themselves from that from the get-go," said Matt Kennedy, an analyst at Renaissance Capital, a manager of IPO-focused funds in Greenwich, Connecticut.

In fact, many of Laureate's numbers are not as bad as critics imply. At Walden, for example, the U.S. Department of Education's "College Scorecard" website says the median annual income of graduates 10 years after getting their degree is $54,900. That's higher than for the University of Texas at Austin, one of the nation's top public universities, and $100 more than graduates of Rutgers University's flagship New Brunswick campus make. Nor does Walden spend an unusual amount on marketing or top executive salaries. Laureate spent $290.8 million, or 6.6 percent of revenue, on marketing in 2014. At Harvard, administrators spent $721 million, about 16 percent of its $4.5 billion budget for 2014-15, on "institutional support," a non-instructional category that mostly pays for fundraising. Laureate competitor Apollo spent just under 20 percent of its revenue on sales and marketing during the fiscal year ending Aug. 31. Becker earns shy of $1 million in salary — less than what Notre Dame pays head football coach Brian Kelly, and less than a number of college presidents who have topped $1 million a year. Becker's total compensation of $2.7 million is about a third of what the University of Alabama pays Nick Saban to coach its football team.

Can a for-profit Ed company do good?

Laureate also seeks to distinguish itself from the for-profit pack through a designation as a "public benefit corporation," a form of corporate organization authorized under a 2010 law, which means a company must commit to doing social good in its incorporation filing. In practice, that means Laureate will tell prospective shareholders it has to put students' interests ahead of profits, Becker said in his letter. "As a leader in this field, we are required to operate with the highest integrity and the deepest commitment to social responsibility," Becker wrote. "This has always caused us to have a culture that combines the 'head' of a business enterprise — scalable, efficient and accountable for measurable results, with the 'heart' of a nonprofit organization dedicated to improving lives and benefiting society."

That's no sure recipe for success. Online craft mall Etsy.com has received B corporation certification three years before its April IPO, but its stock has lost almost two-thirds of its value since surging on its first day of trading. At Renaissance, Kennedy notes that Moody's recently cut Laureate's already below-investment grade bond rating — the lion's share of its debt comes due by 2018, and the $100 million IPO by itself is too small to make much difference. "I think investors believe their outlook isn't particularly bright," Kennedy said.

School's out