The ACT's new ties to a private equity firm are raising eyebrows

As private equity firms have gained a stronger foothold in the American economy, they’ve done little to earn the trust of the general public – a wariness that was exacerbated earlier this year as scores of Red Lobster restaurants, owned by one such company, shuttered.

A month before Red Lobster filed for bankruptcy, an unrelated private equity deal that could have major implications for high school students across the country drew far less attention.

ACT, the nonprofit testing company that administers its namesake college admissions exam to hundreds of thousands of high school students every year, was acquired by Nexus Capital Management, a Los Angeles-based investment firm, the company announced in April. ACT officials said at the time they would transition to organization to for-profit status, a shift that ACT's CEO, Janet Godwin, said would allow the company to expand its offerings into other job readiness areas while retaining its fundamental goal of helping students succeed.

In 2013, Georgia's Fulton County District Attorney Fani Willis indicted more than 30 educators in a standardized testing cheating scandal. Two years later, 11 of them were convicted.

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“We are not veering an inch from our mission,” she said in an interview. The cost of taking the ACT, which ranges between roughly $70 and $100, will not change, she said.

Godwin said she did her homework on Nexus and is confident that ACT's new partner shares her company's values. But the acquisition comes amid a broader wariness about private equity and its expanding influence over American industries. The transition has sparked questions in college admissions circles about what, if anything, the move could mean for students, whose relationship with standardized testing has vastly changed since the pandemic prompted many colleges to go test-optional.

The decision to become a for-profit organization is unusual enough to have spooked some onlookers. The president of a top teachers union opposes it. It also unnerved Dominique Baker, an associate education professor at the University of Delaware and a former admissions dean at the University of Virginia.

“I could see a world where the profit motives create some issues,” she said. “I’m not saying that profit in and of itself is bad. I’m saying that when we see private equity and venture capital move in this way, they are looking at exponential profit almost at all costs.”

What is private equity?

Private equity firms typically buy other companies, which sometimes have lots of debt, before changing things about them to make them profitable. The goal is to eventually sell them and turn a profit for investors.

It’s not necessarily a bad thing, said Benjamin Shestakofsky, a sociologist at the University of Pennsylvania and the author of “Behind the Startup: How Venture Capital Shapes Work, Innovation, and Inequality.” He wasn’t surprised to learn that the sector was setting its sights on the standardized testing market.

“Private equity is everywhere now,” he said. “It’s in housing; it’s in agriculture; it’s in hospitals.”

However, in ACT’s case, the transition from a nonprofit organization to a for-profit corporation raised Shestakofsky’s eyebrows. Now beholden to less stringent financial reporting requirements, ACT may be less transparent about its business as it moves forward, he warned.

“It’s important to remember that this is an organization that’s transforming a nonprofit with a social purpose to what is ultimately an asset in a portfolio,” he said.

‘Not who Nexus Capital is’

Godwin, ACT's CEO, said the move was necessary for her company to bring new products to market and fill unmet needs. The organization went through a methodical process, she said, as it searched for a private equity partner.

For one, she said the firm had to have experience with education companies. (Nexus’ portfolio includes Savvas Learning Company, the former K-12 education technology offshoot for Pearson Education in the U.S.) And it needed to have worked with another company with a social mission, she said. (In 2018 Nexus invested in the shoe manufacturer Toms, which says it gives away a third of its profits to charity.)

Godwin said she was adamant about not enlisting the type of “private equity company that you hear horror stories about, that comes in and cuts costs.”

“That’s not who Nexus Capital is,” she said. “They invest for long-term growth.”

The American Federation of Teachers, a top union for educators, sees it differently. In a statement to USA TODAY, the group's president, Randi Weingarten, said ACT's new structure has created “incentives for misconduct.”

“The ACT has become a public good, relied upon by millions of students to realize their college dreams,” Weingarten said. “That’s why it’s inappropriate for such a significant educational tool to be run by a profiteering private equity fund.”

Nexus Capital did not respond to a request for comment.

Test-optional movement persists

The acquisition follows a sea change in the standardized testing market after the pandemic dealt major blows to the industry’s two major players, ACT and its main competitor, the College Board. The College Board administers the SAT and PSAT, along with Advanced Placement exams and other subject-specific tests.

Since hundreds of colleges and universities nixed standardized tests as an admissions requirement because of the pandemic tumult of 2020, many have concluded they’re better off not demanding them. Going into the fall semester, more than 80% of four-year schools still won’t require applicants to submit ACT or SAT scores, according to the National Center for Fair & Open Testing, a group critical of standardized tests.

ACT’s public financial records show the company lost about $100 million, roughly a quarter of its typical earnings, compared to its average revenue in the few years before the coronavirus shuttered in-person testing centers. Though some of the nation’s most selective schools, including Yale and Dartmouth, have reinstituted admissions exams, the testing landscape remains largely unrecognizable compared to what it was before the pandemic.

What's next?

Most of Gary Berger’s students plan to attend colleges that are test-optional. To them, ACT’s new ownership means little.

If anything, the assistant principal at Rae Kushner Yeshiva High School in New Jersey hopes the change at ACT motivates the test-maker to open digital testing centers where students can take the exam at any time, rather than requiring them to be on campus on specific dates.

“I could totally see them racing to get that market share,” he said.

Mostly he worries about the implications of large amounts of student data transferring ownership from a nonprofit to a for-profit company, which is held to different accountability standards by the government and its own leaders.

That question is bugging Marie Bigham, too. Bigham founded a college admissions advocacy group before starting a tech company a few years ago. Since working in the tech start-up space, she has learned a lot about the cutthroat tactics of some private equity firms. When she first learned about the ACT acquisition, she was concerned.

“In a weird way, I’m grateful for the terrible Red Lobster story for helping explain the story of private equity,” she said.

Zachary Schermele covers education and breaking news for USA TODAY. You can reach him by email at [email protected]. Follow him on X at @ZachSchermele.

This article originally appeared on USA TODAY: The ACT's new ties to a private equity firm are raising eyebrows