BANGALORE, Dec 1 (Reuters) - The final wording of a key U.S. government regulation in the for-profit education sector could act as the starter's gun for a private equity scramble to pick up even some of the industry's leaders. The hotly-debated 'gainful employment' rule, which could be finalized as early as next month, has caused the most uncertainty as it threatens to limit schools' access to financial aid -- which jumped to almost $150 billion last academic year -- and cut student enrollment, putting a big dent in future revenues. The regulatory uncertainty has kept private equity firms at bay this year despite cheap valuations in an industry that saw stellar growth during the recession, but which has been battered by criticism as it loads students with debt and does little to improve their job prospects. "The uncertainty in the sector has for all intents and purposes shut down the mergers and acquisitions market in the sector in the near term," said John Rogers, principal at California-based private equity firm Gryphon Investors. But once the gainful employment rule is resolved and schools figure out how to live with it, private equity is poised to strike. Deals could fetch high premiums depending on companies' exposure to the new regulations, boosting some stocks that are trading at depressed levels. Private equity is no newcomer to the for-profit education sector, attracted by the huge demand for post-secondary education, particularly at a time when there is a weak jobs market and sluggish economic recovery. "All the fundamentals are there to think that one of the large public equities would go private," said Jay Bartlett, co-head of private equity at advisory firm Parthenon Group. Four years ago, some big names in the for-profit space -- Education Management and Laureate Education -- were taken private in deals worth more than $3 billion apiece. BMO Capital Markets analyst Jeff Silber said it was not just stocks such as Corinthian Colleges, ITT Education and Lincoln Education trading at extremely low valuations that are potential targets. "We have had at least one conversation with private equity investors about every post-secondary name we cover, as well as some we don't," said Silber. Providence Equity Partners, part of the private equity consortium that bought Education Management in 2006, is shopping around, while Sterling Partners is keeping a close eye on the sector, according to Nicolas Pechet, managing director at global advisory firm GIA Group. Market leader Apollo Group could be a potential buyer and chase smaller listed firms, said Sandy Mehta at Value Investment Principals Ltd, which holds a stake in the company. DEPENDENCY Deal valuations would hang on companies' dependency on federal student aid -- those with less exposure would attract buyers' attention, said Bruce Eatroff, partner at private equity firm Halyard Capital. American Public Education, Universal Technical Institute and Grand Canyon have the least regulatory exposure among the dozen or so leading players. Investment banker Todd Parchman said potential acquisition targets would be those colleges offering programs that pay off in terms of employment, and debt-laden companies forced to cut the number of programs they offer. "The higher the quality of the program as measured by the new regulations, the higher the multiples," said Parchman. Valuations in the private space tend to run between 8 and 12 times EBITDA, according to Parthenon's Bartlett. "The underlying fundamentals in the business, margin structure and growth, can warrant high single-digit and low double-digit EBITDA multiples," said Robert Lytle, partner at Parthenon's education practice. "But these valuations are contingent on a positive regulatory outcome," he said. TOUGH FUNDING ENVIRONMENT Bob Puopolo, partner at education-focused Epic Partners, said his firm was waiting for the final gainful employment ruling. "Until that time, we're not pursuing anything aggressively. And my impression is that nobody else is either," he said. Several deals were in the offing during the summer but were delayed or called off due to the growing uncertainty, private equity firms said. There has also been a lull in initial public offerings in the post-secondary sector. BMO Capital Markets' Silber said deal financing was likely to remain tough as lenders would be even more conservative. "It may be difficult to get a deal financed until more clarity is provided on gainful employment," he said, adding the main obstacles were structuring deals and resolving ownership issues, rather than current valuations. (Reporting by A.Ananthalakshmi and Megha Mandavia in BANGALORE, Editing by Ian Geoghegan)
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