Blog + Private Equity
Blog + Private Equity
Certainly, there’s lots to discuss in the education deal environment as we close the first third of the year. And, speaking of discussions, how many did you cram in during the ASU+GSV Summit in San Diego last month?! Assuming you could find a place to sit (or in some cases, simply stand) it was a target-rich environment limited only by one’s stamina for conversation. Before we cover some of the notable investment and M&A activity across March and April, we offer three market insights based on our conversations in San Diego.
The relative calm and quiet of 2022 (after a torrid deal-making pace during the latter half of 2020 and 2021) is giving way to an increasing sense of urgency. Those with existing platform assets are understandably more focused on TAM expansion, international, and tuck-in capability deals (e.g., IXL, Houghton Mifflin Harcourt, Perdoceo, Renaissance, Vitalsource). At the same time, others with lightly deployed funds are scouring the landscape for compelling new platform targets. Investors seem increasingly willing to sift through opportunities they may not have during the height of the pandemic purchasing spree in search of a thesis that they can make work.
The inexorable principles of supply-and-demand applied to deal pricing should be in-effect for the balance of 2023. The confluence of a limited number of scaled, high-performing companies in market for the past ~15 months with considerable investor interest in the space, will sustain pricing for the strongest assets (e.g., GL Education, N2Y, Teachers Pay Teachers). We do not expect to see the same pace of large company deal-making as we did in 2021, but 2023 multiples for strong performers may approach some of the highs we saw during that window.
One strategy for taking advantage of current investor demand may be more robust recapitalization activity of established players and/ or shorter hold periods for strong performers. The K-12 instructional landscape is a great example of the former (e.g., see Renaissance and Curriculum Associates), as the increasing scale – and expected valuations – of new oligopoly players makes for a limited buyer pool. Moreover, with the public markets rather frosty, a well-priced recap may provide a compelling alternative in the right circumstances. On the more speculative side, the ability of some companies to sustain – and extend – their pandemic-catalyzed “bump” may encourage some investors to test the markets sooner and lock in a win. While some investors will undoubtedly take the risk, others may turn their attention to early-stage and non-control investments instead.
In shifting to review March and April deal dynamics, we highlight three notable themes.
In February, we highlighted the market’s emphasis on M&A activity in recent months. Of the 30 announced U.S. education deals in January 2023, 25 were acquisitions. The announced deals during March and April paint an evolving picture as the proportion of capital raises increased from 17% in January to nearly 30% across the last two months. The continued trending of increased investment activity would certainly benefit a significant cadre of entrepreneurs and businesses seeking capital. We will continue to track this dynamic closely.
As higher education costs continue to rise and questions about the value of traditional postsecondary education experiences persist, innovative providers are seeking to help colleges and universities address concerns. Increasing tuition fees is not the only factor challenging students; many are also looking for a more career-oriented approach – and connections to the workforce – from postsecondary institutions. A trio of recent deals highlight companies partnering with institutions to better prepare students for employers and the world of work.
Literacy and reading intervention businesses and products remain among the most active of segments across the entire education investment landscape. A duo of strategic acquisitions by established market players and a new platform investment by industry veterans highlight the continued urgency in accelerating students’ literacy competencies in the wake of the COVID-19 pandemic.
Literacy approaches have become increasingly digitized and tech-enabled, with the most recently acquired providers utilizing AI, speech-recognition, and adaptive algorithms. It will be interesting to track the extent to which the promise of these (and other tech-enabled literacy tools resources) significantly improves students’ reading and writing skills.
Additional announced deals in the K-12 literacy arena included Imagine Learning’s acquisition of Winsor Learning and Ignite! Reading’s $10 million Series A financing led by Rethink Education and an illustrious collection of high-net-worth individuals. Tyton’s strategy consulting practice has been active in supporting sponsors’ market diligence in this area, among others.