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Former insiders call for IPs’ skills amid ‘looming crisis’ in universities - Exclusive

Former insiders call for IPs’ skills amid ‘looming crisis’ in universities - Exclusive

29 February 2024

Struggling UK universities need both their own insolvency regime and the help of recovery professionals if their financial situation is to improve, turnaround advisors with inside knowledge of the sector say.

Some 40% of higher education institutions (HEIs) are forecasting a deficit in 2023/2024 according to a report last month by the lobbying group Universities UK. The UK Higher Education Financial Sustainability Report said problems included constraints on income generation, a need for investment, increasing cost pressures, and limited access to finance. 

Tuition fees are set by the Government and have not risen since 2017. The House of Lords select committee that scrutinises regulators including the Office for Students (OFS), the industry and regulators committee, has also highlighted the risk of the sector’s reliance on foreign students, for whom fees are usually much higher and are uncapped, in September last year. The committee warned that neither the Government nor the regulator, the Office for Students (OFS), were tackling the “looming crisis”.  

Writing in the Spring 2024 edition of Recovery magazine, turnaround advisor Matthew Atkinson, who was previously market oversight and finance director at the Education and Skills Funding Agency, said: “Due to a lack of insolvency regime, it’s eminently possible that a medium-sized institution failing mid-year would end up with a student compensation bill running to hundreds of millions of pounds. And you can add to that unpaid creditors, loss of employment, loss of economic value to the area and the cost of the process.”

He added: “Unfortunately, the stress on HEIs is only increasing and not all of the ‘usual’ restructuring methods and tools are available. M&A activity in the sector is extremely rare, and the types of collaboration likely to be required will be new to the sector. Creditor sentiment is now changing for the worse.

“Due to the nature of their constitution, it is incredibly difficult to merge two HEIs. As well as regulatory approval and the usual diligence and governance that accompany a merger, you might need Privy Council approval. This is aside from the academic snobbery that will arise due to each institution’s respective position in league tables. Urgent legislation is needed both to allow HEIs to merge and to facilitate it.”

He added that the sector will need the help of the recovery profession in performance improvement, cost reduction, restructuring, M&A and accelerated M&A.

Faye Dunn, independent turnaround advisor at Dunn Healy and currently an interim director of operations at a UK university, says there continues to be a need for a “special administration that covers the legal situations within higher education”. 

Also writing in the Spring edition of Recovery magazine, she said: “This would be complex to establish and is probably the reason that higher education was excluded from the regime for further education colleges brought in by the Technical and Further Education Act 2017. However, having a form of special administration specific to higher education would assist institutions in addressing scenarios not normally within their grasp, such as running a sales process or undertaking merger talks with other HEIs or investors.”

Dunn set up and led the team to establish the higher education restructuring regime during the pandemic, which temporarily allowed institutions to apply for funding loans to deal with Covid-related financial pressures. 

“It became very clear to me that the sector was unaccustomed to seeking the advice of restructuring, insolvency and turnaround specialists. This skill set is precisely the missing piece that higher education needs. As such, I have been working with various HEIs to address this skills gap within board and management structures to demonstrate the value that the restructuring sector can deliver.”

She says that HEIs could require assistance with forecasting and modelling, and would benefit from restructuring, insolvency and legal advisers, as well as non-executive directors and chief restructuring officers. 

According to a report last year by the regulator and competition authority for the sector The Office for Students, key risks for HEIs include the impact of inflation on costs, increasing reliance on overseas students, especially those from China and challenges for investment. Despite this, the OfS expected the sector to grow its income from £40.1 billion in 2022/23 to £50.1 billion in 2025/26.

Susan Lapworth, OfS chief executive, said: “Universities and colleges have weathered storms over recent years, and most remain in good financial health. This new analysis shows that they are confident that income and student numbers will continue to grow. However, cost pressures are having a substantial impact, with an expected reduction in financial performance across the sector in the short-term.”

“For a small number of institutions, the financial picture is of particular concern and we will continue to focus our attention on those cases. But all institutions will continue to face financial challenges, with a number of risks present at the same time for many.”

The Spring 2024 edition of Recovery magazine will be available in early March. 

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