UK universities are turning to the private sector to meet their funding needs

You’d be hard pressed to walk around campus this term without stumbling into one of the many projects currently being built by the University. Whether this is a new sports centre, student accommodation or even the new monolithic WMG building that’s not even open to students, it’s clear that the University is spending a LOT on these new projects. Traditionally, universities have funded these with long-term bank loans, but with new capital rules in place banks are becoming more selective with who they loan to, forcing universities to turn to the private sector to find funding for their new car park.

A study by the Office for Students estimates that in 2018, UK universities will borrow close to £9bn in total from the private sector, compared to only £3bn in public bonds. Of this £9bn, the biggest borrowers will be Imperial College London (£470m), the University of Manchester (£407m) and the University of Bristol (£395m). You’ll be happy to know that the University of Warwick doesn’t rank within the top 10; it appears we’re either borrowing more sensibly or building multi-million pound sports centres is cheaper to do in the west midlands than in London or Manchester.

Lower ranked universities, who in an attempt to remain competitive, will invest heavily in new facilities to attract top students looking for a university with the best resources

This large-scale borrowing was traditionally done through banks and large public financial institutions; namely because they can offer lower rates and steadier long-term loans. Unfortunately, new capital rules have been put in place to restrict debt levels in the public sector and even the European Investment bank (who has lent £2bn since 2015 to UK universities) has restricted its lending to UK Universities in response to the uncertainty caused by Brexit.

Despite the restriction on public lending, universities will still require funding. This applies mainly to the lower ranked universities, who in an attempt to remain competitive, will invest heavily in new facilities to attract top students looking for a university with the best resources. Combine this and you have a group of universities with nowhere else to turn but the private sector.

Most of these private sector lenders come in the form of asset managers who are attempting to reap the potential benefits that come from investing in the education sector (the demand for education will always be present, irrespective of the state of the economy). For those of you who don’t know what an asset management firm is, they’re large private institutions who make investment decisions on behalf of their clients (the investors) in order to maximise the return on their portfolio of investments. These asset management firms are outside of the new capital rules that apply to banks, and are able to charge a higher rate on their loans.

Whilst this form of securing a loan may seem like a saving grace, many are worried that universities are taking on too much debt with their new-found source of money. The £12bn of total university borrowing in 2018 is the highest rate ever, and it doesn’t seem to be slowing down. Scottish university Heriot-Watt borrowed £112m from the private sector in 2016, and yet despite missing its admission numbers and not hitting revenue targets, it decided to borrow even more money to expand. Couple this with the higher interest rates that come with a private sector loan, some universities are faced with loans they may never be able to pay off.

If you’ve walked in/near the humanities building recently you’ll know that its due for an upgrade

The asset managers, however, seem to be the only people that aren’t worried about the rising debt levels. They’re convinced that if any university defaults on their loan, the government will step in and save everyone. Whilst this may have been the case in the past (recently a £30m government bailout was promised to Lambeth College to facilitate its merger with London South Bank University), the government has indicated it plans to introduce legislation that will allow universities to fail.

Universities will always be looking to improve and build new facilities whether they can get a private or a public loan, and who can blame them? If you’ve walked in/near the humanities building recently you’ll know that its due for an upgrade. They’ll just need to be more careful when it comes to how much they borrow, and on what terms they do. Nobody knows what will happen to the UK economy after Brexit, and the last thing anybody wants is a 9am in a half-finished lecture theatre where you’re getting rained on because the university couldn’t afford a roof.