Education Investment Opportunities Expected from ‘Cradle to Career’

As we turned the page on 2023 in our end-of-year newsletter, we highlighted themes that defined a relatively challenging market for investors. Transaction volumes and values experienced a noticeable downturn globally, across various sectors and regions, driven in part by the high cost of borrowing that dissuaded investors from taking bigger risks to achieve the same level of returns. In education, the impact was especially pronounced, with deals faltering at the last minute, concerns bubbling over changes in funding and regulatory environments, and a sobering adjustment of expectations following a ‘hangover’ from inflated COVID-era valuations.

In this edition, we bring a more uplifting message and have found that this January, our corner of the market has witnessed a resurgence in activity. Below, we delve into our expectations for where we anticipate the greatest traction in 2024 across core segments of the education market.

Early Childhood Education: Active Deals & Growth Opportunities

Within the past month, the early childhood education sector has seen a flurry of activity. The current (albeit debatable) strength of the economy has driven a rising number of parents (back) into the workforce, which has positioned preschools and ECE centers as potentially strong and stable opportunities for growth.

Leeds Equity’s acquisition of Big Blue Marble Academy, a leading provider of early childhood education in the Southeast, serves as a notable indicator of confidence in this sector’s potential stability.

The B2C segment has also generated some attention: Sharpen, an early childhood digital reading program, recently securing $11M in funding. University Games’ acquisition of The Learning Journey, an educational toy company, further underscores the promise in this dynamic space.

K-12: From ESSER Expiration to GenAI and School Choice

ESSER Expiration

Anticipated shifts are on the horizon in the K-12 space, coinciding with the impending expiration of ESSER funds. Although many districts have designated their remaining funds, a significant need to curate and consolidate the myriad of solutions purchased during the pandemic remains. One lasting legacy of COVID-19 – 1:1 device adoption – will persist, which will drive demand for solutions like IncidentIQ, a platform that can effectively track, manage, and support the various devices and solutions used. Efforts to help districts shift from still-analog and under-developed business processes and workflows to more digital ones will be a core feature of investor opportunities in the K-12 ecosystem.

GenAI

Districts’ increased comfort with GenAI, which caught many flat-footed in 2023, is also expected to drive growth opportunities. Analysis tools that can quickly access and query data across various solutions (like Doowi and Mindshine’s Tiva) are solving a critical district need of unlocking data that they struggle to access and make sense of.

Improved chat bots and communication tools driven by GenAI are also presenting opportunities to elevate the experiences had by key stakeholders, both internal and external, which is increasingly important given the increased choice and agency around education options that parents are enjoying.

AI solutions that can detect misuse of GenAI (i.e., plagiarism) and also alleviate the time constraints of teachers through features like automated grading, will remain important in secondary (and also post-secondary) institutions.

School Choice Movement

Opportunities driven by ESAs and school choice movement are expected to drive investor engagement. (Stay tuned for more detailed publications on these trends next month.) Continued investment is anticipated towards both providers facilitating government-to-parent-to-provider transactions, such as ClassWallet, and non-traditional schools offering flexible learning models.

Underlying the broader school choice movement is the increased focus on student success, which spans diagnostic assessments and monitoring through drop-out recovery and has historically been an underinvested space. A demographic worth watching in this trend are the “chronic absentees”, a population that doubled in size between 2019AY and 2022AY. Providers that effectively can re-engage these students will bring a strong value proposition in many districts across the nation and could seek out capital to grow their reach and impact.

Early assessment and measurement providers, like EarlyBird Education, will also play an important role in student success, and will be leaned on by parents and districts alike to ensure their students’ needs are understood and being addressed.

Postsecondary: Regulatory Respite, Approaching Milestones, and Admissions Changes

Within higher education, an exhale is expected from the threats of increased regulation that hovered over 2023. While the OPM market may never fully recover to its previous form, investors exploring other higher education providers are not likely to be considered “third-party servicers” and thus beholden to their clients’ Title IV compliance liability.

Driving additional growth in this segment with several major providers, including Ellucian, EAB, and McGraw Hill, are nearing the end of their holding periods, and will drive a significant bump in transaction values if and when they come to market.

It wouldn’t be right to exclude the landmark 2023 ruling “gutting” affirmative action and noting the ripples it will continue to have among the HED community, despite its still emerging implications. We expect the SCOTUS decision on affirmative action, in conjunction with continued adoption of test optional policies and growing acceptance of “direct admissions”, to catalyze increased attention and growth for providers offering admissions consulting, college/career navigation and lead generation and enrollment management technology/services. As we noted earlier this month, other categories along the higher education to workforce spectrum continue to gather momentum as well.

Growth Drivers and Emerging Themes in Human Capital Optimization

The mixed perceptions of the economy’s strength, and the likelihood that the upcoming presidential election will only add to the competing narratives, are top-of-mind. These components lead us to believe the importance of labor productivity will increase among employers who look to upskill and reskill employees in anticipation of a market dip.

Alongside re-skilling for specialized technical skills, employers continue to cite employee deficiencies in soft skills like critical thinking, creativity, communication, and collaboration. Digital and blended platforms incorporating the three key principles of personalized, continuous, and modular learning through generative AI and AR/VR are expected to garner the most attention from both customers and investors.

At the same time, the uncertainty of the job market may lead to potential increased market activity centered around solutions targeting job candidates and hiring managers. Inspirit Capital’s acquisition of  Wiley’s Edge business, a provider that sources, trains, and deploys high-potential entry-level talent to employers, highlights a version of the “hire-train-deploy” model that investors will continue to actively pursue across 2024.

The pace, rate, and quality of education investment opportunities will continue to improve in 2024, particularly as the excesses of 2020-21 recede and strong performers from that period come to market. However, competition for deals will also be intense; many investors remain focused on the sector and have spent the past several years sharpening their perspectives.

As you pursue your next platform opportunity, take advantage of Tyton Partners’ expertise to secure an unfair advantage.