The professional training sector has benefitted from a variety of recent favorable trends, leading to an acceleration of mergers and acquisitions activity as larger operators begin to take a more prominent role in a fragmented industry. This has resulted in the consolidation and combination of a number of small companies, including the recent purchase of driver training firm Smith System, based in Arlington, TX, by Levine Leichtman Capital Partners, a Los Angeles private equity firm.
The Smith transaction is one of seven professional training deals since 2012 in which Baird has been directly involved, reflecting a strong focus on the sector by private equity and strategic buyers. Private equity firms love these businesses because they typically have high margins, recurring revenues, and generally are asset light with low capital intensity. Additionally, the private equity principals who formerly invested in for-profit post-secondary business in the early to mid-2000s still like the long-term trends in education and are looking to broaden their approach. Given the regulatory overhang and poor performance of higher education assets since about 2008, sponsors are looking to the professional arena as another way to “play” the education sector. Several universes of strategic parties also are attracted to this space—publishers looking for growth outside of their shrinking print media business, consulting companies hoping to smooth revenues through non-project-based recurring business, and post-secondary education companies seeking sources of non-Title IV (private-pay) revenue.
Changes on the Way?
This recent spate of deals heralds significant changes to the training industry. Small local or regional providers with a narrow content focus now dominate the sector, but the current wave of consolidation deals likely will result in the emergence of some larger and more dominant companies. There are practical reasons for this fragmentation, such as the diverse professional training requirement of different states for different industries. Eventually, those providers that can demonstrate a superior return on investment (ROI) through measurable metrics—whether through higher test pass rates, improved sales, avoided incidents, or hard dollar savings—will win.
That’s largely because small players likely cannot optimize content development, marketing, and technology infrastructure. Working with multiple training providers is also inefficient for national companies seeking vendor consolidation and coast-to-coast consistency for all of their employees. There’s a scarcity of true “platform” businesses with a supra-regional or national presence and more than $10 million of EBITDA. Over the next several years, we anticipate that larger companies will continue to gain market share and consolidate smaller players to achieve efficiencies. Increasingly, winning business in this market is about marketing automation—having robust direct market capabilities and SEO (search engine optimization) as being first in Google search results is critical. The largest players stand to benefit as the industry consolidates.
Training Demand Will Grow
The demand for professional training services will continue to grow, thanks to an increased focus on professional accountability in the U.S. In part, this is due to mandated state and federal regulatory changes such as Dodd-Frank or the Affordable Care Act, which have raised the bar in terms of the number of hours and the frequency of mandated training, as well as added complexity for certification requirements and monitoring.
Additionally, the consequences of noncompliance—litigation, financial penalties, and headline risk for failure to maintain trained or certified employees—have increased. In the areas of safety and risk management, in particular, there are significant tangible costs and other issues associated with negative events, which are pushing companies to invest meaningful resources and hire third parties to help manage the risks and ensure proper training for their professional staffs. You don’t have to look far—Enron, Bernie Madoff, the BP oil spill—over the last decade, the market has become much more attuned to the high cost of noncompliance.
Continuing Skills Gap
The continuing U.S. skill gap also has driven employers’ expenditures up. Turnover and hiring costs are expensive and there just aren’t enough qualified candidates in the hiring pool. Therefore, employers are finding it more efficient and necessary to “upskill” their existing employees. For individuals, the proliferation and availability of modular content has changed the way people consume training. New models of providers such as Pluralsight, Lynda, etc., as well as Massive Open Online Courses (MOOCs), have empowered individuals to design their own curricula and enhance their skills in a highly customized, user-friendly way.
The industry as a whole has adjusted to changes among its professional customer base. Modality has continued to move online (with both asynchronous and synchronous delivery), with the most dramatic acceleration occurring in the last three or four years. While corporate learning management system (LMS) technology has been around for a while, the proliferation of mobile devices over the last several years, the reliability of high-quality video, and streaming capabilities have made this a far more attractive medium than in the past. It’s easy to envision online or hybrid (blend of virtual and physical) training eventually will constitute the majority of corporate or professional training.
In-Person Component
That said, many individual users and corporate clients have a strong preference for physical, synchronous delivery—and, in some cases, this is a “must” to achieve the right outcomes. It’s still hard to teach certain skills or behaviors (e.g., operating machinery, learning medical protocols, management coaching) without an in-person component. So, in-person training will always have a role, and these higher-touch, in-person services will become premium priced products over time.
Andrew Snow is a managing director and Daniel Alfe is a director at Robert W. Baird & Co. They lead its education and training franchise.
