k1 Ventures owns 12.2% stake in KUH (Knowledge Universe Holdings, LLC). KUH owns approximate 65% stake in KUE (Knowlege Universe Education LP). KUE owns 100% stake in KUE LLC (Knowledge Universe Education LLC). KUE LLC owns approximately 20% K12, INC. K12, INC.
At 30 June 2012, KUE indirectly owned 4,665,083 million common shares and 2,750,000 convertible Series A non-voting shares of K12, Inc (NYSE: LRN). Upon conversion of the Series A shares, KUE will indirectly own approximately 7.4 million
common shares of K12, Inc., which represents approximately 20% of the outstanding shares and valued at approximately US$170 million on 30 June 2012. (k1 annual report 2012)
Whitney Tilson takes a short position on K12. Whitney Tilson is the founder and Managing Partner of Kase Capital Management, which manages three value-oriented hedge funds. Backdrop of the move is presented on an article "An Analysis of K12 (LRN) and Why It Is My Largest Short Position" which can be downloaded here :
http://www.tilsonfunds.com/K12-Tilson-9-17-13.pdf
Here’s the summary of why he is short K12’s stock (page 8 of his presentation):
· K12's aggressive student recruitment has led to dismal academic results by students and sky-high dropout rates, in some cases more than 50% annually
o I wouldn't be short K12 if it were carefully targeting students who were likely to benefit from its schools – typically those who have a high degree of self-motivation and strong parental commitment
§ But K12 is instead doing the opposite; numerous former employees say that K12 accepts any student and actually targets at-risk students, who are least likely to succeed at an online school
§ One former employee said: "K12's recruitment of inner-city and at-risk "last resort" students had another benefit – these students used up less of K12's educational and teaching resources while permitting K12 to collect full funding from the states."
o Like subprime lending and for-profit colleges, the business makes sense on a small scale but, fueled by lax regulation and easy government money, the sector has run amok
· There have been so many regulatory issues and accusations of malfeasance that I'm convinced the problems are endemic
o Enrollment violations, uncertified teachers, conflicted relationships with nonprofit charter holders
· I have been looking for years and have not found a single K12 school that is free of scandal and posting even decent (much less good) academic results
· States (and the IRS) are waking up to what K12 is doing and the company is coming under increased scrutiny, which is beginning to impair K12's growth – and I believe this trend will accelerate
· Yet the stock, trading at nearly 50x trailing earnings, is priced as if K12 will continue to grow at high rates for the foreseeable future and also improve on its persistently low margins and free cash flow
<not vested>
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