Go Big or Go Home

Something important has changed in education investing over the past 18 months and the month of June marked this change with an exclamation point, as private investors made some massive bets on future growth. Activity in June capped nearly $20 billion in new private investments in the first half of 2021. The degree to which all forms of education became reliant on digital modalities during the pandemic has given investors new conviction around market size and trajectory such that they are prepared to assign greater values to assets than ever before.

An important part of this has been the awakening of the public markets to the growth potential of technology in education, cementing EdTech as a new asset class. The emerging appetite for new public EdTech equities includes the IPO of Coursera, the SPAC acquisitions of SkillSoft (Tyton advised Churchill Capital on the deal) and Varsity Tutors, and the filed IPOs of PowerSchool, Duolingo, and Instructure (private for barely one year.) This embrace by the public markets, in turn, has created a permission structure for private equity firms to put billions in new funds to work.

The investment themes of these massive deals are familiar: better, cheaper, faster alternatives to traditional education offerings; training to address skills gaps in the labor market funded by both consumers and corporate buyers; services that help universities enter new markets; SaaS companies supporting education administration; and anything and everything else credibly facilitating the move to a digital education environment. What is common across all of the deals however is the conviction around scale and growth implied by their valuations.

June mega-deals included:

TPG sold higher education ERP provider Ellucian jointly to Blackstone and Vista Equity in a deal reported to be in excess of $5 billion. (Tyton Partners produced a seller’s market study for TPG and Ellucian in conjunction with the sale.) TPG originally acquired Ellucian in 2015 for $3.5 billion. The company currently has 2,700 college and university clients using its enterprise-planning software, which encompasses student advising, financial aid and various data and analytics. While universities love to hate their software providers, switching costs in this category are quite high and the company enjoys deep moats in the functional areas that it serves. The two firms will house the investment in long-term funds, and each has a demonstrated commitment to the education technology sector. Among other related assets, Vista owns PowerSchool which also filed for an IPO in May.

Apollo Global Management sold McGraw Hill to Platinum Equity for $4.5 billion, a healthy 10x multiple of EBITDA. Apollo first acquired what was then known as McGraw Hill Education in 2012 for $2.5 billion, or 7x EBITDA. While the education publisher has struggled at times with contracting demand for paper-based textbooks, competing rental businesses, growing market fragmentation, and growing hostility to its prices, it is today a fully digital courseware provider that remains at the center of the instruction materials market. Platinum’s statement regarding the sale indicated a core belief that operational improvement and investment would yield continued growth for the content company in the current migration to digital learning.

2U announced a definitive agreement to acquire the assets of the previously non-profit MOOC provider EdX from owners MIT and Harvard for $800 million. The proceeds will be used by the two founding universities to promote further equity in education and to maintain an open-source platform for hosting courses. But the site’s existing revenue-generating businesses and Web traffic will become part of 2U. The proposed combination would create a meaningful new competitive dynamic in the OPM market as 2U estimates a savings of $40-$60 million in student acquisition costs and makes it likely that the combined entity will be a more meaningful competitor in both the short-course and corporate training markets than the thinly resourced EdX was on its own.

Higher education service provider Guild Education raised another $150 million led by Bessemer Venture Partners at an eye-popping $3.75 billion valuation. (For perspective 2U [NASDAQ: TWOU] is currently valued at $3.24 billion.) This brings the total venture capital raised by the company to $378.5 million. Guild, which facilitates employer-sponsored programs with university partners plans to use the new funding to grow its coaching team, expand its platform with more short-term certificates, and increase its outreach with historically Black colleges and universities. At a moment in time when institutions are keen to grow their adult student enrollment, companies are looking for innovative ways to attract employees and workers are increasingly feeling empowered to drive their own training agenda, Guild is the “it” company at the intersection of higher education and human capital management. But the tripling of valuation from its last round of funding is certainly a function of the new market demand that its sponsors see in the public equity markets.

Age of Learning, creator of the ABCmouse student learning platform raised $300 million in a funding round led by TPG. The digital education platform company saw its usage among families surge more than 50% during 2020, making it perhaps the quintessential pandemic edtech provider. The company will use the proceeds to further its international expansion and continue to evolve the features and function of its platform. The company also began offering its consumer-facing subscription-based services to schools last year as they tried to cope with engaging younger students in a virtual format.