After a red-hot 2021, education sector M&A activity has tapped the brakes this year. It’s symptomatic of a wider dealmaking slowdown across all industries against a testing macroeconomic backdrop. According to Refinitiv, global education M&A deal value more than halved this year so far, falling from $15.44bn over the first nine months of 2021 to $7.6bn for the same period this year. However, 2022 is in line with pre-COVID-19 deal volumes.
Activity levels across the full spectrum of education – from early years and nursery provision through to tertiary education and corporate training – have tailed off, with cooling investment and valuations in the converged education and technology (edtech) space particularly noticeable.
According to figures compiled by Crunchbase, seed and venture capital rounds for edtech and education companies over the first eight months of 2022 fell to $5.43bn, down from the $15.85bn posted over the same period in 2021. This marks the lowest year-on-year figure for education funding rounds since 2017, with investors taking pause as valuations for fast-growing edtech platforms are recalibrated in the face of rising interest rates, high inflation and soaring energy costs. The higher education course platform Coursera, for example, has seen its stock price fall by around 70% since its IPO last year, while digital classroom provider Udemy has seen its valuation fall by close to a third since listing in October 2021.
Jamie Edge, EMEA head of education and training M&A at EY, says: “The high levels of investment in education and edtech assets that were observed in 2021 have slowed in 2022, in line with cooling across wider markets. Valuations have corrected and investors are much more cautious than 12 months ago.”
Strong fundamentals
The slowdown in deal activity and valuation reset in education does not, however, mean that corporates are putting deals on the backburner or that private equity firms are abandoning the sector. The frenetic pace of dealmaking and buoyant expectations for edtech growth made 2021 an outlier for education dealmaking. While deal volume and value have now dropped from those heights, Refinitiv data shows that overall education deal value for the first nine months of 2022 has remained above the pre-pandemic levels seen in 2019.
The underlying drivers behind growth in the education space also remain firmly in place, despite a tougher economic outlook. EY’s Edge notes that the increased use of digital tools for education provision through lockdown has transformed the sector for the long term. “Lockdown saw a step change in attitudes towards digital technology and the widespread adoption of digital tools and data to broaden access and reshape provision,” he explains. “Even as classroom settings have reopened post-COVID-19, provision has changed and a blended model of learning has become embedded.”
In August this year, LDC acquired Avantis, a provider of virtual reality-based learning technology, from Key Capital Partners, which will retain a stake in the company. Avantis technology is used in more than 100,000 classrooms and LDC sees an opportunity to expand the company’s global client base as well as its suite of products, as uptake of digital education tools continues to grow.
Rowan Grobler, an investment director at Gresham House Ventures (GHV), adds that while technology is unlikely to replace the physical classroom, “digital learning is here to stay”, as demonstrated by the earnings growth at GHV portfolio company MyTutor, a digital platform that matches school pupils with university student tutors for online lessons.
“Throughout the lockdowns, MyTutor has performed incredibly well and we have seen sustained demand for platforms that can facilitate digital learning, manage safeguarding, connect teachers and students and handle all the administration,” Grobler says. In education sub-sectors such as early learning and back-office software, meanwhile, deal activity driven by industry consolidation is showing no signs of coming to a halt either.
Early learnings
The children’s nursery sub-sector is one area that has seen significant deal activity during the past five years, as private equity firms and corporates have deployed large amounts of capital into nursery platforms and then built scale through the acquisitions of small operators. Examples of UK nursery chains that have scaled at pace include Kids Planet, which has almost doubled in size to nearly 100 nurseries, and Family First, which has grown its portfolio of sites from four to nearly 50.
Grobler says rising energy and wage costs are likely to continue spurring consolidation deals in the nursery space, where GHV has backed day care provider kidsunlimited (currently being rebranded as Bright Horizons). “In order to run profitably, nursery businesses have had to build scale to leverage head office resource and keep operational costs down. Rising energy costs and wage inflation are likely to make economies of scale even more important and support ongoing consolidation in the space,” he says.
Back-office education software, which has become an essential tool for education businesses to handle administration and maximise operational efficiency, is another area within the sector currently attracting multiple offers from interested buyers and undergoing consolidation. Five Arrows, for example, backed KidsKonnect, a Dutch software provider of software for childcare companies (see box, ‘Building scale’).
“The provision of back-office solutions to education groups will remain an active area for deal activity,” says Edge. “A large wave of consolidation is under way in this space, with large buy-out firms and strategics involved that are eager to build market share through consolidation. Processes for these deals have remained competitive and valuations have held up.”
Port in a storm
Year-on-year education M&A figures may be down and valuations may have come off the peaks observed in 2021, but deals are still getting done. When dealmakers weigh up investments in other industries, education remains one of the most resilient sectors for deploying capital in a volatile market.
In addition to consolidation plays and sustained interest in edtech assets (albeit at lower volumes), education sub-sectors such as compliance-led corporate learning, which are non-discretionary for businesses, also continue to attract strong private equity and trade interest. Dealmaker appetite for businesses plugging the digital skills gap or providing alternative pathways into the workforce, with train-to-deploy, bootcamps and other vocational models, also remains robust.
“The macroeconomic backdrop is challenging and everyone is reassessing risk appetite and investment priorities,” says GHV’s Grobler. “Overall, education does have defensive characteristics and it will be an option for sponsors that want to put capital into stable, safe-haven assets.”
Edge adds: “Despite the slowdown in education investment activity, the sector will be one of the most investable in the coming months, as macroeconomic headwinds build. Buyout and venture capital firms still have large amounts of dry powder to deploy and if they look at all the options open to them, areas such as education and healthcare will offer the most defensive attributes.”
Down, but not out
This year hasn’t been the easiest for edtech start-ups. Inflation and rising interest rates have seen investors tighten the purse strings and valuations – underpinned by buoyant growth projections – have corrected.
However, the edtech slowdown doesn’t mean investors have turned their backs on the transformative impact that technology has on education provision.
Earlier this year, for example, the Austrian edtech unicorn GoStudent, an online platform that connects students between the ages of six and 19 with private tutors, secured €300m Series D funding and acquired UK algorithmic learning content group Seneca Learning, as well as Tus Media Group, an open tutoring marketplace in Spain.
Edtech platforms positioned to cover these shifts in the provision of education and expectations of learners remain active and attractive to investors.
“The efficacy and pedagogical benefits of tech-enabled delivery have become clearer,” says EY’s Jamie Edge, “as has the realisation that technology can assist in the democratisation of learning, with the upending of the long-held assumption that you have to live in a high-quality area in order to access high-quality education.”
Building scale
Consolidation in the nursery and daycare sector has been bubbling away for years. Now the providers of software to childcare providers are following the same blueprint.
“It has been interesting to observe how the consolidation in the nursery sector is now filtering into the nursery management software space,” says GHV’s Rowan Grobler, who worked on the firm’s investment in Connect Childcare, an end-to-end system for nursery administration. “We are seeing a very similar pattern emerging, with firms making sizeable platform investments with a view to expanding through acquisition.
“Systems such as Connect Childcare have become an intrinsic part of how nursery operators run their businesses. Efficiency is key in the nursery space, so a tool that can simplify administration tasks and keep head office costs to a minimum is compelling for nursery operators.”
Other private equity firms have also moved into the space, with a recent example being Five Arrows backing the secondary buyout of KidsKonnect, a Dutch childcare company software provider, from BB Capital. During its hold, BB Capital merged Konnect with Flexkids to form KidsKonnect, which is now used by more than 10 companies serving one million children under the age of 12. Turnover at the business was up 10-fold on 2019 levels when Five Arrows invested.
Similar buy-and-build strategies targeting childcare software are now anticipated, as providers look to develop scale and cost efficiencies and win bids to supply the largest nursery and daycare businesses.
First published in Corporate Financier, Issue 247, November 2022
