When Investor Incentives and Consumer Interests Diverge: Private Equity in Higher Education

Review of Financial Studies, Forthcoming
Best Paper Award, Private Equity Research Consortium 2018
Coauthors: Charlie Eaton and Sabrina Howell

This paper studies how private equity buyouts create value in higher education, a sector with opaque product quality that is heavily dependent on government subsidy. With novel data on 88 private equity deals and 994 schools with private equity ownership, we show that private equity buyouts lead to higher tuition and higher per-student debt. Exploiting loan limit increases, we find that private equity-owned schools are better able to capture government aid. After buyouts, we observe lower education inputs, graduation rates, student loan repayment rates, and earnings among graduates. While enrollment increases, neither changes to the student body composition nor a selection mechanism fully explain the results. In a subsidized industry, private equity owners’ high-powered incentives to maximize value may intensify focus on capturing government aid at the expense of consumer outcomes.