On the rebound

When will deal volumes recover? The question is not if, but when, writes Josh O’Neill on the back of an EducationInvestor Global webinar

Up until around February, European education businesses were riding a wave of fresh capital supplied by perhaps the most diverse range of investors to date. Private equity funds continued to drive growth in the lower- through upper-mid-market, which last year saw 30 deals, while patient capital from family offices and pension funds bankrolled six multibillion-pound buyouts, according to consultancy EY-Parthenon. Deal volume was at the highest point in a decade; valuations were, too.

“Investing in education was really hot in the past several years leading up to 2020,” said Derrick Betts, associate partner at EY-Parthenon, during a webinar hosted by EducationInvestor Global. “The sector moved from being seen as a traditional mid-market segment when some significantly large deals came through”, propelling the industry to a new level of maturity and scale.

Then, the Covid-19 pandemic struck.

Suddenly, owners, deal-makers and investors were scrambling to get a handle on companies’ finances, as revenues plummeted when government-enforced lockdowns closed almost all educational centres indefinitely. (It is still unclear when many of them, including universities, will re-open.) Debt quickly became more expensive and less readily available. Stringent social distancing measures confined the majority of citizens to their homes, preventing business meetings, in-person interviews with management teams and other key components of due diligence. There is, of course, Zoom and other video-conferencing platforms. But, as one private equity investors puts it: “Video conferencing doesn’t quite give either side enough confidence to go into a partnership together.”

Several important deals that were in play – including the sales of pathway provider Oxford International and French childcare giant Babilou, among others – were “put on ice”, sources told this publication in March. Meanwhile, private equity firm Silverfleet Capital cancelled entirely the sale of portfolio company Lifetime Training, an apprenticeship provider, after its revenues were decimated by the effects of the pandemic.

And although a handful of transactions have closed in recent months – for example, London-listed Myanmar Strategic Holdings’ purchase of Wall Street English Vietnam, and China Education Group’s takeover of Richmond, The American International University – deal flow in the sector has dried up significantly. It would take a minor miracle for transaction volumes to reach those recorded last year. A key question is now: how long before M&A activity in the education sector returns to pre-pandemic levels? ▶

Derrick Betts, EY-Parthenon

▶A poll of around 100 webinar viewers carried out by

EducationInvestor Global found that the majority (57%) thought it would take between two and three years; 31% one year or less; and 12% three years or more. But Jamie

Edge, head of education & training M&A at EY, was more optimistic. Speaking on a panel alongside Betts, he said:

“I’d take a slightly more favourable view and say about two years.”

Edge, a corporate financier, said that while serious conversations with private equity houses around management buyouts had become less frequent, talks with venture capitalists, who provide fledgling firms with growth funding, had gathered momentum. Many companies, particularly ed techs, experienced surges in interest and user numbers when nurseries, schools, universities and tutoring centres were ordered to close in the UK in March. This has led a number of them to spark discussions around fundraisers, he said. “We’ve had growing businesses in the digital end of the market come to us saying that they’re inundated with demand,” said Edge. In May, Twinkl, a digital educational publisher, found itself among the top-100 most frequently visited websites in the UK. “In a lot of cases, many of them have been giving their products away for free to drive adoption and now need help, in terms of funding, to help them cater to new, increased demand,” he added.

According to HolonIQ, a data provider, venture capitalists poured $3 billion into ed tech organisations during the first quarter – a period when hundreds of millions of students worldwide were forced to switch to home learning. More recently, in May, UK-based ed tech BibliU netted $10 million in a Series A funding round, after virtual flashcard platform

Quizlet raised $30 million and MasterClass, which sells video lessons taught by celebrities, raised $100 million.

Bouncing back In the wider education market, companies’ ability to ’bounce back‘ once operating conditions improve will be a crucial

Jamie Edge, EY

factor, according to Rory Nath, investment director at ECI Partners, a UK-based buyout house. “Frankly, that is the overriding factor right now,” he said, while reiterating Edge’s observations around venture capital, “but another I consider critically important is a clear angle of differentiation”.

Nath, whose fund focuses on chiefly on educational services and ed tech, said he had noticed growing interest in education companies providing “niche” services or products to professionals and consumers in specific fields. As one of many examples, he flagged gardening, interest in which has reportedly boomed since people have been confined to their homes with, in many cases, little work to do. Investors will question, however, whether rapid increases in sales will be sustained in the longer term, said Nath.

Not all segments of the education industry will recover at the same pace because businesses, depending on their remit and online capabilities, have been impacted in different ways, explained Sam Fenton-Whittet, investment director at private equity firm Oakley Capital. He pointed to international student recruitment as an area in which performance will be “very hard to predict over the next three years”, while nursery operators, for instance, should see demand return relatively quickly once they are able to re-open.

Private equity has historically steered clear of education businesses that rely heavily on government funding – either directly or indirectly. Many buyout funds have little or no appetite to own private companies that cater to publiclyfunded education providers, such as school suppliers or catering businesses, for example. But the coronavirus crisis, which forced central banks and governments globally to spend billions propping up economies through quantitative easing and statebacked support schemes, could alter this perception, FentonWhittet argued. “We could see sectors that were perceived as quite risky, because of their exposure to government funding, become more attractive,” he said. Edge concurred: “It’s probably not a bad place to be at the moment, because there is a defined funding model supported by government.”

Sam Fenton-Whittet, Oakley Capital

The good, the bad and the average EY-Parthenon carried out an analysis of Covid-19’s impact on a range of sub-sectors within Europe’s education industry in an effort to identify how valuations will be affected as a result of the pandemic. It graded 11 educational segments – some which utilise traditional delivery models, and others that are technology led – based on their ability to obtain financing and long-term outlooks.

The consultancy found that traditional corporate training providers would be hardest hit, suggesting the sector’s long-term outlook and financing prospects are “weak” and that the effects of Covid-19 would be “highly negative”. According to Betts, this is because large corporations tend to cut spend on management training and other non-essential outgoings during periods of recession when revenue is weakened.

Meanwhile, K12 service providers, which sit in a “fundamentally strong” sub-sector, according to the research, will fare better, suffering a “modestly negative” impact. Private schools were considered to have a “strong” long-term outlook and access to finance but would also experience a “modestly negative” medium-term impact.

Higher education services, which encompasses pathway providers, would experience a “highly negative” impact in the medium term, according to EY-Parthenon, though the sector’s long-term outlook and access to financing remains “strong”. Apprenticeship providers and traditional universities were given the same long-term outlook, but the impact on these businesses would be less severe in the medium term.

Early years and technology-led K12 services ranked in middle ground, as the sectors’ long-term outlooks and Covid-19-related impacts were scored “medium”.

Technology-led corporate training would be “largely unaffected” by the pandemic, EY-Parthenon found, rating its long-term outlook as “medium”.

Rory Nath, ECI Partners

For digital degree providers and online universities, Covid-19 would be a “net positive”, the firm said, noting that their long-term prospects and access to financing was “strong”.

Looking forward, taking into account all sub-sectors, Betts said: “The fundamentals of investing in education remain the same and many business models are super-attractive. There’s no doubt that investors will be drawn back to the sector because of its long-term fundamentals.”

The show must go on The pandemic and its financial effects will ultimately cause pricing to “normalise” across the education industry, and in some sub-sectors, “pricing will go down,” said EY’s Edge. This would almost undoubtedly be welcomed by investors – but not vendors – in the private schooling sector, in which priceto-earnings multiples last year consistently floated in the mid to high teens, and under some larger deals exceeded 20.

Whatever the extent of the fallout, and even if lockdowns continued into next year, deals will eventually be done, panellists agreed. Fenton-Whittet said that Oakley Capital, his fund, has commenced digital due diligence on two education companies.

In time, the show will go on. It has to. After all, the global private equity industry is sitting atop of more than $2.5 trillion of unspent capital known as ‘dry powder’ – and partners of buyout funds do not earn management fees and carried interest, or carry, unless they buy and sell businesses. A point will come when money will begin to burn a hole in private equity’s pocket. This will drive growth in the midmarket, the largest segment of the European education arena, and the rest, in theory, will follow. n

The webinar can be viewed at ipevents.net/ webinars/educationinvestor-webinars/shelterfrom-the-storm-investing-in-education-amidthe-covid-19-pandemic