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Education trends: Growing investor interest meets evolving business models

Source: LEK’s report ‘Education: 2021 deal round-up and trends to watch out for in 2022’

Despite disruption caused by the pandemic, the education sector has seen a rise in M&A activity in the last two years, with a sharp increase in deal flow, a flurry of funding rounds in the ed tech space, strong buy-and-build platforms and a rising number of new players approaching the market.

According to LEK Consulting’s report “Education: 2021 deal round-up and trends to watch out for in 2022”, 415 deals were inked across the sector in 2021 – a significant increase from 285 in 2020 and 277 in 2019 – while average deal value stabilised at around $200 million.

Aggregate deal value also increased significantly, reaching $33.5 billion in 2020 and remaining solid in 2021, when it amounted to £31.8 billion.

The surge was partially driven by an increase in megadeals (deals with EV equal to or larger than $500m), which accounted for 66% of total deal value in 2020, one of the highest on record, and 55% in 2021.

Source: LEK’s report ‘Education: 2021 deal round-up and trends to watch out for in 2022’

Furthermore, a wider and more differentiated pool of investors entered the sector to catch the promising opportunities offered by non-cyclical education assets and digital ed tech businesses.

“The distinctive high defensibility of this industry has attracted different types of investors beyond private equity and family offices, such as foundations and pension funds,” said Jitin Sethi, partner at LEK Consulting’s Global Education Practice. “The beauty of the education investment landscape is that it can add significant value to all types of portfolios. Long-term investors such as infrastructure and pension funds can focus on traditional segments like pre-K, K-12 and higher education, all of which exhibit the typical characteristics of a long-term asset class. On the other hand, private equity firms, growth funds and venture capital houses, with their relatively shorter investment horizon, can focus on technology-driven opportunities such as new digital models and education services, which have recently achieved very high valuations.”

Geographical distribution

In 2020 and 2021, investment in education significantly increased in North America, Europe and Australia compared to previous years. In Asia, strong growth in India was offset by a slowdown in investment in China, where deal value decreased considerably in 2021 due to the adverse local regulatory environment.

Source: LEK’s report ‘Education: 2021 deal round-up and trends to watch out for in 2022’

“India accounted for around 17% of total education investment in 2021, a fourfold increase over its 4% share in 2018,” said Sethi. “This indicates diversification of investments and growing interest in this large yet fragmented and underpenetrated market.”

In the developing world, investment in test prep, tutoring and enrichment (TTE) represented over 50% of the total deal value recorded in 2021.

In more developed countries, there was a higher degree of differentiation in the segments targeted by investors and a large proportion of the capital deployed went towards the upskilling, higher education, education services and publishing sectors.

“In emerging markets, the desire of parents and students to spend on reinforcement solutions due to the poor quality of traditional education and a school system based on competitive exams has created strong demand for out-of-school preparation,” said Sethi. “More developed countries do not present this strong driver and investments tend to be more abundant in segments backed by government spending and in adult training and upskilling.”

Source: LEK’s report ‘Education: 2021 deal round-up and trends to watch out for in 2022’

As global mobility starts to pick up again, the pathways market is beginning to regain confidence, especially in countries with favourable travel policies. The pent-up demand is fuelling growth in Canada and the UK, followed by the US, with Australia likely to recover soon, according to the report.

Looking at the main source countries for international students, China was top until 2014, while India has become the primary source country in the last few years.

“Beyond India, we expect other Asian countries such as Bangladesh, Vietnam and Indonesia to increase their overseas student flows following a rise in their per capita growth rate,” said Sethi.

Source: LEK’s report ‘Education: 2021 deal round-up and trends to watch out for in 2022’

Strong consolidation in the K12 market

Investment in core education segments such as K-12 continued to garner significant investor interest in 2020 and 2021, despite a reduction in investment flow caused by the pandemic.

Source: LEK’s report ‘Education: 2021 deal round-up and trends to watch out for in 2022’

“This sector is highly fragmented, with the top-10 international school groups accounting for less than 20% of the total international K-12 market,” said Sethi. “Fragmentation means that there is plenty of room for aggregation and consolidation. We have recently seen several buy-and-build transactions sponsored by private equity firms that are trying to build larger platforms through a series of add-ons, thus substantially increasing the value of their initial assets.”

Among others, Partners Group-backed International Schools Partnership (ISP) has been pursuing an intense buy-and-build strategy with 50 add-ons inked between 2014 and 2020. Last year, Omers Private Equity acquired a 25% stake in the company, in a deal which valued the asset at around €1.9 billion. Following the deal, ISP chief executive Steve Brown said the business was committed to using part of the proceeds to further expand its global network with additional acquisitions.

More recently, Stonepeak invested €1 billion in exchange for a minority stake in Inspired Education, another schools operator that has been building a large platform through an intensive acquisition strategy. With Stonepeak’s support, Inspired plans to further accelerate its growth and global expansion through selective acquisitions.

“Overall, we expect more activity for both large and mid-sized platforms”, said Sethi. “The K-12 market has demonstrated significant resilience during the pandemic, making investors see this segment as a safe and defensible space. This will continue to fuel consolidation in what remains a fragmented market in most regions.”

Tech-driven models

The pandemic was a strong driver for boosting investments in online, digital and tech-enabled businesses across the education industry, especially those operating in the TTE, corporate training, upskilling and reskilling segments. Around 50% of total education investments in 2020 and 2021 were deployed into tech-driven companies, according to LEK’s report.

Source: LEK’s report ‘Education: 2021 deal round-up and trends to watch out for in 2022’

“The traditional higher education sector, with its focus on first-time learners, is not geared towards delivering continuing education, which has led to the emergence of businesses – often tech-driven – focused on providing new skills, upskilling and reskilling,” said Sethi. “Various models have emerged to meet this demand, including micro-credentialing, short-term targeted courses, and bootcamps. Which of these succeed is open for debate, given that the landscape is still evolving, and there may be room for multiple models to co-exist.”

Demand for online services able to deliver after-school learning has been strong in developing markets, including Indonesia, Malaysia, Singapore and Vietnam.

“After-school TTE is a fast-growing area ripe for technological disruption, especially in Asia,” said Sethi. “Previous surveys conducted by LEK in Asia have suggested a dramatic increase in the willingness of parents to adopt online models for after-school reinforcement and a preference for blended learning since Covid-19.”

As more countries reach a point where every student has access to a device and high-speed internet, businesses that leverage technology to deliver education and improve outcomes are thriving.

Sethi said: “Education services that enable classroom digitisation, facilitate better technological operations of schools and colleges, ensure student safeguarding, and support community engagement, are likely to attract the largest portion of investment across the education industry in the coming quarters.”

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