Private Equity’s Influence: From Red Lobster to the ACT

As private equity firms exert greater influence over the American economy, they’ve struggled to win public trust – a sentiment exacerbated earlier this year when numerous Red Lobster restaurants, owned by one such firm, closed their doors.

Just weeks before Red Lobster filed for bankruptcy, another private equity transaction with potentially significant implications for high school students went largely unnoticed. ACT, the nonprofit organization responsible for administering the ACT college admissions exam to hundreds of thousands of students annually, was acquired by Nexus Capital Management, a Los Angeles-based investment firm, in April. The acquisition signaled ACT’s transition to a for-profit entity, a move ACT CEO Janet Godwin claimed would enable the company to expand into additional educational areas while maintaining its mission of student success.

“We are steadfast in our mission,” Godwin affirmed in an interview, asserting that the cost of taking the ACT, typically ranging between $70 and $100, would remain unchanged.

While Godwin expressed confidence in Nexus Capital’s alignment with ACT’s values, the acquisition has fueled broader concerns about the role of private equity in American industries, particularly education. The shift to for-profit status raised eyebrows among observers, including Dominique Baker, an associate education professor and former admissions dean.

“I foresee potential issues arising from profit motives,” Baker cautioned. “Private equity and venture capital often prioritize exponential profit, which can pose challenges.”

Private equity firms typically acquire companies, often burdened with debt, to restructure and turn profitable. Benjamin Shestakofsky, a sociologist, noted the increasing presence of private equity across diverse sectors, including standardized testing.

“Private equity’s ubiquitous presence isn’t surprising,” Shestakofsky remarked. “However, ACT’s move to for-profit status raises questions about transparency and accountability.”

Godwin defended the acquisition process, emphasizing Nexus Capital’s experience in education and its commitment to long-term growth. She distanced Nexus Capital from the cost-cutting reputation associated with some private equity firms.

Meanwhile, the American Federation of Teachers criticized the move, asserting that placing such a critical educational tool under a profit-driven entity could incentivize misconduct.

The acquisition coincides with a significant shift in the standardized testing landscape following pandemic disruptions. Despite some universities reinstating admission exams, a majority of four-year schools continue to adopt test-optional policies, reflecting evolving perspectives on standardized testing’s role.

Looking ahead, educators like Gary Berger are monitoring developments closely, particularly concerning data privacy and the implications of ACT’s ownership change.

Marie Bigham, a college admissions advocate, expressed cautious optimism amid concerns over private equity’s practices.

“In a curious way, the Red Lobster incident helps illustrate the broader implications of private equity,” she reflected.

As ACT navigates its new ownership, educators, students, and advocates alike await further clarity on its future direction in an evolving educational landscape.