The UK’s first for-profit university, the University of Law, appears to have been “loaded” with the £177 million debt that a private equity firm took on to buy it and is now owned by a parent company registered in Guernsey.
Significant financial developments for English higher education are revealed in the university’s first accounts since it became a for-profit.
The former charitable College of Law was sold to Montagu Private Equity in November 2012, a sale completed only when the institution had been awarded university status by the government. Times Higher Education reported last year how the award of university status appeared to be hurried through to meet a deadline in the sale process.
The government has since recommended the University of Law – which has two centres in London and another seven in cities across England – as a model that publicly funded universities may wish to follow. But some observers question whether that is right for universities, comparing the sale to the kind of leveraged buyouts seen in Premier League football.
A university spokeswoman highlighted the benefits of the transition to for-profit status. Since then “the level of capital investment in the…learning and teaching infrastructure has increased ten-fold”, she said, allowing the launch of a new undergraduate law course.
The sale of the former College of Law to Montagu was seen by some as establishing a model that could allow publicly funded universities to be sold to, or to sell stakes to, private investors. The joint Department for Business, Innovation and Skills/Department for Education International education strategy: global growth and prosperity, published in July 2013, said that institutions such as the University of Law “have amended their governance structures, establishing models that could be of interest to others”.
The departments warned universities that their “current structures could mean that international opportunities are taken by other organisations with fewer constraints”.
The university’s accounts, for the year ending 31 July 2013, show a debt of £177 million marked as “amounts due to group undertakings”. That closely matches the sum of about £200 million reportedly paid by Montagu to buy the institution.
Adam Leaver, senior lecturer in business analysis at Manchester Business School, said private equity firms in general “borrow the money from a bank or other lender to buy out a firm and then put the debt on to the bought-out company’s balance sheet…It is then the bought-out company’s responsibility to pay down the debt plus interest from its cash flow. This has the additional benefit of being tax efficient because interest payments depress taxable profits on the bought-out company.”
The University of Law made a loss of £7.7 million in 2012-13, after the takeover, meaning no corporation tax would have been due. A university spokeswoman said this “was caused by a number of exceptional costs, mainly due to the reorganisation of the university’s financial structure”, a structure she described as “conservative”.
When profits are returned, any tax will be calculated on the basis of financial results from the group parent company, which owns the university. The accounts make clear that the University of Law’s ultimate parent company is L-J Holdco Limited, “a company incorporated in Guernsey”, which is majority owned by Montagu-managed funds.
Guernsey is known for its low-tax regime, although it is understood the university’s parent company is registered in the UK for tax purposes, meaning it pays UK corporation tax. Other benefits of Guernsey ownership include more flexibility on the return of capital to shareholders after the sale of a business.
Asked why the parent company is registered there, the spokeswoman said: “We pay corporation tax. Guernsey is a very commonly used holding company locale.”
Andrew McGettigan, author of The Great University Gamble, noted that the government had held up the University of Law as an example to universities. “But these accounts show what that entails,” he said.
“The University of Law has been loaded with £177 million debt…and is now ultimately owned by…a company registered in Guernsey. Is this really the direction English higher education should follow – copying what we’ve seen in English football?”
The university’s spokeswoman said investment after the change in ownership had brought direct improvements to the student experience and to the condition of its study centres. The university pointed out that proceeds from the sale were invested in a charitable foundation to further the study of law among disadvantaged groups.
“Also, our new ownership structure allows us to respond to opportunities which by definition require significant levels of financial investment, evidenced by a pipeline of exciting new academic offerings and our current review of international expansion opportunities,” she added.