A Record-Setting Year for the Tyton Partners Banking Practice Provides Strong Momentum and a Favorable Outlook for 2022
2021 proved to be another record year for Tyton Partners Capital Markets, with 20 deals completed across the PreK-12, Post-Secondary, and Corporate L&D global markets. The current near-term macroeconomic conditions remain favorable for M&A with robust deal volume, continued record pricing, significant interest from a new class of investor categories, and strong activity in key burgeoning ed tech subsegments.
Favorable Market Conditions Continue, Driven by Significant M&A Despite Inflationary Conditions
With the turn of the calendar, we face some looming dimensions of impairment relative to the cost of capital and inflation as the Fed will promote additional interest rate hikes; however, we believe that although public markets might see a contraction in multiples due to higher rates, the demand for private middle market growth companies will continue to be robust in spite of this backdrop of volatility and a hawkish Fed.
The exponential rise of the aggregate amount of dry powder from multiple classes of investors and the dramatic increase in education related thesis driven investing syndicates (both institutional and alternative) create the supply-demand imbalance. There is too much capital, chasing too few deals of scale globally (e.g., platforms producing north of $100 MN of GAAP revenue), creating tension due to the scarcity of large-scaled targets. Despite the dramatic growth of target capital and the commensurate rise in volume of investors chasing it, we should see sustained record high multiples for the foreseeable future.
We expect to see continued record flows of venture and growth stage capital coming into the global ed tech and knowledge services markets following a $28 billion infusion realized in 2021. This is the result of VC fund formation or add on LP commitments (VC funding increased more than 300 percent from 2020 to 2021). The volume and breadth of companies receiving Venture stage investments (Super Seed to Series A, B, and C), coupled with the ability for those companies to reach the important scale benchmark of $15-$20 million of ARR or GAAP revenue, in condensed timeframes, has created a significant increase in the number of mature growth stage investment opportunities. The enormous volume of Private Equity and strategic acquirers seeking this stage of these enterprise grade investment opportunities continues to ramp. These are typically target companies doing between $10 and $100 million of revenue and this is where the vast majority of education and knowledge services trades occur globally in the lower middle market.
Additionally, the number of large ed tech companies with valuations over $250 million has continued to expand with the markets bearing witness to an unprecedented number of investment targets becoming global ed tech unicorns. The number of ed tech unicorns increased from 15 in 2020 to 32 in 2021.
New Classes of Investors are Laser-Focused on Education
There is an enormous increase in non-institutional alternative lender capacity focused on ed tech growth stage segments, which creates further competitive dynamics with equity investors. The rise of billionaire impact investors, family offices, Sovereign Wealth funds, and double impact mega caps that have access to billions of dollars to invest in the global knowledge sector are also at levels never seen before.
The rise of creative family office structures and emerging forms of venture debt provide alternatives to companies that are 6-18 months away from exit that desire non-dilutive growth capital to preserve equity, drive near-term growth, and maximize investor returns on future exits in the lower middle market.
These alternative asset class investors’ actions, coupled with a staggering amount of thesis-driven education capital coming into the emerging global knowledge services and technology arena, is driving a view that the “industrial asset class” definition can now be attributed to these broad based and global markets.
Targeted Subsegments in the Global Knowledge and Services Markets
While COVID has driven a paradigm shift across the Global Knowledge market over the last 24 months, we expect to see some related pivots for businesses as students re-enter physical learning environments en masse now and throughout the year. The rise and rapid growth of the hybrid B2B and B2C platform models that possess the ability to adapt and scale to meet the needs of learners and workers are here to stay.
Education and knowledge services investments will also experience a continued serialization of investment silos, with large market-defined categorical investment interest being elevated. We have seen the rise of fintech, health tech, real estate tech, cloud-based analytics tech, blockchain tech, AI and cybersecurity, digital curriculum, and AR/VR/XR in service of learners and education institutions as employers’ commensurate interests begin to cement in dramatic form. New specialty submarkets are being borne before our very eyes, enabling the ed tech specialist advisors to rule these domains.