Skills: a struggling sector or an investment opportunity?

21st November 2023
With a number of recent high-profile failures in the market, providers and investors alike have been reaching out to us to discuss the future of the UK skills landscape and its attractiveness for investment.

Before delving further, let’s briefly outline what we mean by a skills business. We are referring to independent commercial providers that train adults in industry-relevant vocational skills. Typically, these operators receive funding from government agencies such as the Department for Education (DfE) or the Education and Skills Funding Agency (ESFA), through structures including the Apprenticeship Levy and the Adult Education Budget (AEB).

These businesses have been making headlines for all the wrong reasons recently, with the market seeing several examples of high-profile failures and organisational restructurings that could deter potential investors. However, in this article, we argue that the skills space continues to be highly investable. It remains a sector with strong fundamental tailwinds, not least because of the ongoing national awakening to the importance of FE, and attractive businesses persist within it, including success stories such as Corndel and The B2W Group. We believe that the contributory factors behind the aforementioned struggles are either temporary or navigable and investors therefore have a great chance of success if they undertake full and thorough due diligence.

Why does the skills sector remain an attractive investment opportunity?

We believe that the skills sector is an exciting space that will continue to be driven forward over the coming years by a number of strong tailwinds, including:

  • The skills gap: It is no secret that the UK and many other developed economies have, for a while, been facing a significant skills gap, with employers unable to recruit people with the skills required to fill their vacancies. Estimates vary around the extent of the issue but whichever way you look at it there is a clear need for a bolstered Further Education and skills sector. In 2019, the Open University calculated that the skills gap was costing the UK economy £4.4bn per year. In the same year, the Industry Strategy Council estimated that, by 2030, nearly 20% of the UK workforce will be significantly under-skilled. Many believe the pandemic significantly widened the skills gaps as there has been an exponential update of digital technologies and the trend towards remote work has been a negative for communication skills. This position is supported by calculations by The Skills Builder Partnership who reported that the cost to the UK economy in 2022 of low ‘essential skills’ was £22.2bn. Brexit no doubt contributed to increasing the acuteness of the skills shortage and may now force the country to improve the economy by investing in the productivity of the remaining UK workforce.
  • Reskilling and the half-life of skills: In the not so distant past an individual could learn a set of skills that would get them through their entire career. This is no longer the case with research by IBM suggesting that skills generally have a half-life of five years, with the figure as low as two and a half years for technical skills. The advancement of technology has resulted in an increase in the frequency with which workers need to undertake reskilling in order to remain relevant and employable in the workforce. Digital skills are becoming ever more important and the rapid rise of AI will no doubt further shorten the half-life of skills.
  • Appetite for Furthering Education: Around the country there is a desire for politicians to move away from their obsession with Higher Education and to place a greater focus on FE. In a report commissioned by Progressive Britain and published by Public First, a poll of 8,000 people demonstrated high levels of support for vocational skills training. 48% of respondents were in favour of expanding apprenticeships for 18-year-olds and 34% wanted to see greater allocation of funds for training courses for working adults. Both of these options proved significantly more popular than either restoring maintenance grants for university students or lowering university tuition fees.
  • Cross-party support for the skills agenda: Off the back of party conference season, both Labour and the Conservatives have said they will prioritise technical education. This is a significant development as the sector has for a long time felt somewhat forgotten by Westminster. Politicians have recognised the need to act to address the skills gaps and are listening to voter support for FE.
  • Growth in the apprenticeship levy: Receipts from the apprenticeship levy have surpassed £3.5bn and the government forecasts the total to keep on rising. However, there is significant disparity between this figure and the funding currently spent on apprenticeships. In 2022/23, the budget allocation across England and the devolved nations was over £400m below levy receipts and, on top of that, the DfE underspent the budget by almost £100m. The sector is putting increasing pressure on the government to ensure that the half a billion in underspend is committed to properly funding the sector. This could take the form of an elevated minimum funding level, which would be a significant step towards ensuring the profitability of all standards.
Why have some skills businesses struggled?

The factors contributing to the recent spate of bad news stories in the skills space have been varied, however we have identified 5 recurrent themes.

  • Unpredictable government contract procurement: Government funding forms a significant revenue stream for private operators. The unpredictability and complexity of funding procurement impedes providers’ long-term planning ability and is thus leading to instability. Skills Training UK going into liquidation was, in part, linked to their failure to obtain AEB contracts in the latest procurement round, whilst Babington is undergoing a major restructuring after failing to secure a contract. Learning Curve Group was another big name provider to miss out on a contract and they have taken legal action claiming that the ESFA’s reasoning was brief and vague. Key Training recently ceased trading after 50 years of operation and, whilst the immediate trigger was reported as the company being unable to renew borrowing arrangements with their bank, it comes shortly after having missed out on both devolved and non-devolved AEB funding. The lack of transparency in the process is further demonstrated by the unexplained appearance of The Portland Training Company on the list of successful tenders, in addition to the disappearance from the list of TLG Business Services.
  • Regulatory instability: Over recent years the skills space has been subject to a range of regulatory changes and some businesses have struggled to deal with these. An example lies in Traineeships. In late 2022, the government scrapped Traineeships despite their own research having demonstrated their effectiveness. This was a significant blow to providers with a Traineeship offering, such as Skills Training UK who subsequently went into liquidation. Provision previously delivered through Traineeships was integrated into 16-19 study programmes, however many providers that held a 16-18 Traineeship contract did not hold a 16-19 study programme contract. Regulatory uncertainty is unlikely to stabilise in the near future, as demonstrated by the fact that, if they come to power at the next general election, the Labour Party has committed to flexing the apprenticeship levy to cover short courses. Exactly what this will look like is unclear, but it could pose challenges to providers focused solely on apprenticeships.
  • Positioning in unattractive segments of the market: Within any part of the skills market there are disparities in the attractiveness of delivering different courses, with the apprenticeship space being a key example. With variation from standard to standard in funding levels, learner demand and completion rates, certain standards are far less attractive to providers than others. These variables, and therefore the attractiveness of the opportunity to providers, are often corelated with the level of the standard and the industry sector to which it is relevant. Certain standards are traditionally more relevant to smaller business and so providers of these standards may struggle as uptake of apprenticeships by SMEs continues to dwindle. In addition to the challenge of delivering poorly funded standards at a reasonable margin, there have been discussions in the sector that delivery of low funding band standards precludes a provider from achieving an ‘Excellent’ Ofsted rating, because the quality and service standards required to do so cannot be delivered on low levels of funding. Capita, The Skills Network and Avado are all examples of providers that have taken significant strategic decisions about their positioning within the skills landscape based, at least in part, on the level of funding available in the areas in which they were operating.
  • Ofsted failures: Ofsted ratings indicate the overall effectiveness of a provider, influencing perceptions of quality amongst learners, employers and the wider sector. Qube is an example of a large provider that received a ‘Requires Improvement’ rating and the business recently ceased trading after the DfE ended its contract. Other large providers that are still trading but have been heavily impacted by negative inspections include Kaplan and Lifetime Training, both of which received ‘Requires Improvement’ in summer 2022.
  • A tight labour market: Brexit and the pandemic fuelled an exodus of overseas workers, thus driving acute shortages in the UK labour market with over 1m job vacancies across the country, and this is causing skills businesses to rethink their strategies. PeoplePlus chose not to renew their AEB contract in light of the tightness in the labour market. They were seeing potential candidates being able to bypass additional skills training programs and instead move straight into employment.
How can Cairneagle help investors successfully navigate these challenges?

There is no doubt that government action is required to address the challenges listed above, however even now we believe that significant opportunities exist for successful investment in the sector. We believe that each challenge is either transient, foreseeable or only applicable to certain businesses within the sector. We are therefore confident that investors can identify and target attractive assets within the skills space, if they ask the right questions.

  • How large are the segments of the skills market in which this provider operates? What are its key drivers and what tailwinds/headwinds exist?
  • What are the key funding streams for this provider? How have funding levels changed and how are they likely to change in the future?
  • To what extent is this provider dependent on particular qualifications and funding streams and what are the risks around them?
  • What are the prerequisites for winning the contracts this provider holds and is this provider well-placed to renew them in the future?
  • What is the competitive landscape around this provider? What advantages does this provider hold over its competitors and vice versa?
  • Do we understand the regulatory landscape in which this provider operates and how is that landscape likely to change moving forward?
  • Is this provider’s offering rooted in training that is a non-negotiable prerequisite for building a career in that space, or is it a means for applicants to differentiate themselves when the job market is crowded?
  • What are this provider’s main opportunities for growth? Is there growth in their current position or should they be considering adjacent opportunities?
  • What are the key adjacencies to this provider’s offering into which they could diversify? How attractive are these options and to what extent does the business possess the agility required to adapt to such changes?

With our profound understanding of the sector and extensive commercial due diligence experience, both in the UK and internationally, Cairneagle is well-equipped to help answer these questions.

If you would like to learn more about Cairneagle’s education practice, get in touch.

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