Private equity is playing an increasing role in transforming education companies large and small. While most focus is on the large deals currently underway in the media sector, PE is involved in almost all the areas of business covered in the assignment report.

Therefore, the recent blunt warning by the International Monetary Fund (IMF) in its Global Financial Stability Report, that many large PE deals are saddling companies with unsustainable levels of debt, has set alarm bells ringing.

Part of the argument by the IMF and other financial commentators is that as asset prices have skyrocketed, PE deals have become bigger. At the same time investors have become less discriminating because of the competition for huge deals. The IMF also say that the factors behind the PE boom - international economic growth, strong corporate profits and low interest rates - will change and probably have a serious impact on large, highly leveraged PE deals.

Investment analysts we have spoken to point to the sale of Harcourt and Thomson Learning as examples of mega deals likely to go to PE firms, just like Wolters Kluwer’s recent sale to Bridgepoint Capital. It’s unlikely that either company could be ‘sweated and flipped’ (to use industry parlance) as there are few PE funds who can invest £3-5bn on a single business and far fewer who could manage or would be interested in a £10bn education business. This makes it likely that if PE buyers are successful, firms will be wholly or partially broken up, as we saw with Granada Learning in 2006.

At lower levels (deals from £2-100m) there will probably still be plenty of opportunities for PE funds in the education market. However, the issue of paying too much for assets and saddling them with large amounts of debt will remain a dangerous mix if the economic outlook changes.

www.imf.org