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Partnering Trends, Primary Benefits
A-HEC: For several years you have been helping higher
education institutions consider new approaches, such as for-profit spinouts of non-profit and public institutions. Is interest
in these types of partnerships increasing and what is driving this trend?
MG: There seems to be increasing interest in new approaches by both non-profit and public institutions,
investors and strategic partners to strategies that allow each to benefit from the resources and capabilities of the others.
The drivers are straightforward: institutions need to find ways to generate new financial resources - particularly capital
- to achieve their goals; investors see postsecondary education as a long-term growth market; and strategic partners are looking
for opportunities to leverage assets more effectively (efficient ways to integrate with their clients.) Key to these partnerships
-- and I use this term in its loosest rather than narrow legal meaning -- is the emerging understanding that the functions
of a 'traditional' college can be unbundled, distinguishing between those activities that must be retained within the academic
enterprise and those that can properly be carried out by another entity.
A-HEC: How would you characterize the type(s) of institution(s) that should be seriously
considering partnerships of this nature?
MG: This is probably the question I am asked most frequently. But it should be turned on its head. The
issue is not what type of institution but rather what is the reason for the partnership. The key to a viable partnership is
determining that the outcome will be mutually beneficial to the partners: doing it for the sheer joy of being 'cutting edge'
is certainly wasteful and probably affirmatively dangerous. Obviously, an institution needs to either be entrepreneurial in
order to successfully enter into one of these arrangements, and it has to have the legal capacity to do so. Beyond that, everyone
can play.
A-HEC: What are the most significant benefits to considering formation of a for-profit
entity in which a non-profit institution holds an ownership stake?
MG: The first is access to the capital marketplace. Traditionally, colleges have raised capital by begging,
borrowing or working for it (that is, contributions, debt and tuition). The traditional capital market approach of selling
equity has simply not been there, since no one can "own" a piece of a non-profit and of course that is equally true for a
public institution. Unbundling the institution provides one way to resolve this problem by creating a "capitalizable" entity.
The second is the possibility of capital appreciation, particularly if the institution's investment is intellectual
property, know-how or sweat (that is, the skills and services it brings to the partnership). As a part owner in a venture
the institution has the opportunity to not only benefit from the revenue it generates but also of its potential for appreciated
value. It is particularly appropriate to note here that this June the Internal Revenue Service issued a Revenue Ruling making
joint ventures between non-profit institutions and for-profit companies much easier, less risky and more profitable for the
non-profit.
The third is flexibility. While a for-profit venture is not necessary, the creation of an entity that
is separate from the restrictions of the non-profit or public institution can be a real benefit. Academic policies are by
their nature conservative and restrictive, for many good reasons. Because of that they are not very well suited to entrepreneurship.
A separate venture can allow the institution to participate in activities that would be difficult or impossible if operated
within the structure of the college.
Finally, there is protection. A separate entity, properly organized, can provide
a "fire wall" between an activity and the core institution. Risk is limited to the amount of the investment, and liability
generally cannot reach back to the resources of the institution itself. Since colleges are notoriously risk-adverse, this
approach can allow a school to take somewhat more risk without putting the "family farm" on the block.
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" . . . institutions need to find ways to generate new financial resources . . ."
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Summary of Key Benefits:
- Access to Capital Markets
- Chance for Capital Appreciation
- Additional Flexibility
- Protection Against Potential Failure
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"As a part owner in a venture the institution has the opportunity to not only benefit from the
revenue it generates but also of its potential for appreciated value."
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"It is particularly appropriate to note here that this June the Internal Revenue Service issued a Revenue
Ruling making joint ventures between non-profit institutions and for-profit companies much easier, less risky and more profitable
for the non-profit."
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"Risk is limited to the amount of the investment, and liability generally cannot reach back
to the resources of the institution itself."
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