As pandemic-fueled demand drove education revenues and deal prices to record levels in the first year of the pandemic, key questions we were asked repeatedly by investors in both diligence and banking assignments were: Is the growth sustainable? Is the market demand for the products sustainable and will the current level of enthusiasm among investors supporting asset prices persist? As the dust settles on the second full year of the pandemic, we believe the answer is a resounding “yes.”
COVID-19 has forever changed how institutions think about delivering education and how consumers think about consuming it, and the investment activity we witnessed in the sector in 2021 is, in many cases, just laying the groundwork for themes that are likely to develop over a period of several years. Education has become a new asset class and while asset prices could face some downward pressure in the near term as the Fed is likely to raise interest rates, we believe the underlying growth of the sector will continue to drive investor interest in 2022.
Education Investing in 2021: The Reckoning
Institutional spending on strategies for remote digital instruction have continued unabated and, in some ways, intensified as federal relief dollars continued to flood the K-12 and postsecondary sectors in 2021 and administrators were able to shift their attention from pandemic-mitigation tactics to longer term strategies to provide more robust alternatives to classroom-based instruction. And for their part, consumers continued to spend large amounts on education as well, though the categories of spend appear to have shifted, with supports for students working from home slowing as students returned to school and campus, while tutoring and other remedial products appear to be gaining ground.
On the other hand, there is nothing ambiguous about the continued investor enthusiasm exhibited in 2021. At the close of another manic fourth quarter, education deal volume was on pace to set more records for both transactions and venture investing despite the mid-year implosion of Chinese activity caused by an abrupt change in government policy in that country. Activity came across all asset classes and forms – large multi-billion and multi-hundred-million-dollar transactions, public market filings, and smaller tuck-in as well as mini-platform investments. Social impact investing also remained a growing trend, as education continued to gain share within that category.
Market confidence that EdTech is a new and permanent asset class was further solidified in 2021 by the amount of capital that investors put behind efforts to achieve true scale, both by adding products to vertical market platforms, and by efforts to build out horizontal approaches to drive lifetime customer value.
In 2021, Tyton Partners analysis indicates that the number of control transactions in the broadly defined education market grew 84% to 345, while the number of minority growth investments grew 10% to 296. Among minority investments, early-stage (Seed and Series A) investments grew 212%. With respect to EdTech investing specifically, HolonIQ reports nearly $21 billion in venture investments in the sector in 2021 and this month Owl Ventures announced more than $1B in new capital for new investments in EdTech.
Efforts to achieve meaningful scale through consolidation accelerated
Perhaps the most prominent example of the effort to consolidate in support of scale this past year was in the higher education software sector which saw two seismic trades, including the multi-billion sale of ERP giant Ellucian to Blackstone and Vista Equity Partners and the subsequent merger of Veritas Private Capital’s Anthology with Blackboard for a deal with a combined value of $3 billion. It’s a fair bet that the two deals are likely to drive further consolidation as each investor group seems ready to bet on the growing need among higher education institutions for additional software supports across the entire student lifecycle from enrollment through career placement. Indeed, in the first two weeks of 2022, Ellucian announced the acquisition of financial aid software provider Campus Logic.
Intensified competition for robust software platforms led private equity firms to move further outside of their typical size constraints to secure smaller, high-quality assets to support land-and-expand EdTech strategies. Examples include Bain Capital’s acquisition of early childhood center and learning management platform HiMama, KKR’s acquisition of another early childhood content and assessment platform Teaching Strategies, and PSG Equity’s acquisition of student success software platform DigitalEd. (Tyton Partners performed diligence for Bain in its acquisition of HiMama and separately represented Digital Ed in its sale to PSG.)
While private equity was pursuing vertical market solutions, a couple of notable strategics extended their offerings across a horizontal axis, looking to leverage consumer marketing acumen and extend their customer lifecycles. Higher education powerhouse Chegg purchased Busuu, a consumer-facing language learning software company for $436 million, nearly 10x the UK company’s expected 2021 revenue. The acquisition expanded Chegg’s paid subscribers by 500,000, extended its reach internationally, and provided additional product support to its existing college-student customers.
In a similar vein IXL, which previously had focused on institutional and consumer offerings for children and young adults with games, instructional materials, and tutoring, acquired the language learning software company Rosetta Stone, extending its reach into the adult market with a full PreK-to-Gray portfolio. And no discussion of M&A activity in 2021 would be complete without mentioning the massive build-out of Byju’s which, while remaining focused on products for PreK-12 students, has amassed a wide range of product offerings across an ever-widening portfolio of countries.
Making Accommodation for School Disruptions
The pandemic disrupted K-12 schools in a profound way, with remote learning bringing parents into their children’s classrooms in unprecedented ways. In many cases as a result, families chose DIY education models (e.g., homeschooling, learning pods, microschools) or private education alternatives. This dynamism spawned the development of a host of new experimental solutions representing a hybrid between home and private school options for families that wanted something in between. In 2021, Tyton Partners, with support from the Walton Family Foundation, published a series of reports examining these new educational models and concluded that this hybrid form was likely to remain as a new category of instruction – and a new market – even after the urgency of the pandemic has faded.
While some of these new school models, including SchoolHouse and KaiPod, received start-up funding in 2021, later-stage investors turned to more established companies focused on learning remediation. Several private schools further consolidated the market including Forfar Education (which acquired Park School, Dean Park Day Nursery, Cameron House and Horris Hill,) Cognita Schools (which acquired Obersee Bilingual School), Leeds Equity-owned Endeavor Schools (which acquired Heritage Montessori), and International Schools Partnership (which acquired Mosaic School.)
2021 also saw a renewed interest in tutoring platforms well suited to addressing the learning loss experienced by K-8 children in 2020. Nerdy, the parent company of tutoring marketplace Varsity Tutors, came public through a $1.7 billion SPAC transaction. Also in 2021, Atlanta-based Roark Capital acquired franchise tutoring provider Mathnasium and publicly-traded Franchise Group acquired Sylvan Learning with both investors betting on parents desire to help their children supplement an uneven school experience. (Tyton Partners represented Sylvan.)
Other investors put dollars behind companies focused on helping schools with the expected challenge of bringing students back to grade level. Leeds Equity’s investment in the literacy curriculum company 95 Percent Group is an example of this approach to the issue.
New Models for Workforce Training
A lingering effect of the pandemic has been significant disruptions in the labor market. This disruption extends from lower-wage service positions, which may appear less appealing and riskier in the context of the pandemic, to higher-skill jobs where the pre-pandemic skills gap appears wider than ever. As a result, 2021 saw three important investment themes further accelerate: 1) education as an employee benefit; 2) reskilling and upskilling employees; and 3) independent consumer-facing solutions for upskilling and reskilling.
Fears that education-as-a-benefit was a cyclical phenomenon relevant only during periods of peak employment were confounded during the pandemic when unemployment first spiked and then collapsed and efforts to recruit hourly wage employees expanded the number companies offering support for college programs. In 2021 Amazon, Target, and Walmart all announced new or expanded free college programs, joining a host of other employers already committed to this benefit for hourly wage workers. Many of these employers are partnered with third parties, including InStride, EdAssist, or Guild. In June, Guild announced a new capital raise at an eye-popping $3.75 billion valuation.
Corporate learning continued to receive attention from investors in 2021. In April, corporate upskilling leader Degreed raised new capital at a $1.4 billion valuation. In June SkillSoft was acquired by SPAC Churchill Capital Corp II and then subsequently acquired Global Knowledge to create a new publicly traded corporate training behemoth. (Tyton Partners advised Churchill II on the transaction.) A host of other smaller companies operating in the corporate sector raised substantial rounds of growth capital including a $40M raise for LMS provider Cypher Learning from Invictus Partners, a $42M round for virtual reality workplace training provider SightCall from InfraVia Capital Partners, and a $37 million round for remote worker management and training app Connectearn led by Insight Partners, among many others.
Finally, on the consumer side of workplace training, EdTech investors maintained a keen interest in alternative credential providers. Revelstoke’s sale of Carrus to Penn Foster contributed to the latter’s continued emergence as a leader among providers of broad-based workforce upskilling and reskilling. In the IT vertical, we saw interest in bootcamps expand beyond coding instruction to other emergent and fast-growing areas of the tech labor market, including data science and cybersecurity. Cybersecurity training leader Hacker U further consolidated its market with a $50 million acquisition of rival Cybint. In a similar vein, Leeds Illuminate made a sizable minority investment in product management training provider Product School. (Tyton Partners acted as exclusive financial advisor to Product School.) However the largest endorsement of the long term strength of the consumer market for alternative credentials came with the $800M acquisition of edX by 2U.