The education sector, considered among the most resilient investment bets for private equity (PE) players, has seen a shakeup in business with the coronavirus crisis sending millions of children home on a prolonged break from classrooms.
Even as the extended time away from schools has led to a surge in online classroom models and allied tech-enabled learning services, several transactions in the pipeline have been pushed to the back burner, say industry observers.
This is primarily because risk capital investors are increasingly preferring to adopt a wait-and-watch approach as they seek clarity on the road ahead. This has left several deals in Southeast Asia, which were in the works before COVID-19 struck, in limbo.
Over the last few months, several investors have been looking to cash out from their education investments in the region. Private equity firm Southern Capital, for instance, has been seeking to exit its investment in Singapore-based Canadian International School (CIS), early childhood education and daycare operator Star Learners and Malaysia’s private educational institution HELP. Vietnam’s VI Group, too, is looking to sell its stake in Wellspring International Education. Meanwhile, UK-based Actis is understood to be planning an exit from Indonesia’s Singapore Intercultural School (SIS Group).
Apart from PE exits, some M&A deals, too, were in the pipeline. Vietnam’s ELT chains Apollo English and Apax English, for instance, were both looking to rope in new investors, we have previously reported.
COVID-19 has swept the world, brought about a lot of uncertainty and created sudden and unpredictable demand shock, said Sandeep Aneja, a managing partner at education-focused PE firm Kaizenvest. “GPs like us have temporarily shifted our focus and energy to stabilise the investment portfolio, to diagnose challenges, and to assist these companies with crisis management plans.”
More than 190 countries have temporarily closed schools and universities, impacting over 91 per cent of the world’s student population. In Vietnam alone, schools have been closed since Lunar New Year at the end of January 2020.
“This is expected to have a significant impact on the KPIs an investor would normally look at,” said Sjoerd Zwinkels, principal at Vietnam’s Mekong Capital.
Industry watchers reckon that deals might also be getting stalled due to a drop in valuations in the current environment. Education is not always a “cannot-be-disrupted” sector and the value of fixed assets may not be as high now as they used to be, said Aneja.
We understand from market sources that Actis’s plan to divest its stake in SIS has been shelved due to the COVID-19 outbreak.
Similarly, Southern Capital’s plan to sell Singapore-based Canadian International School (CIS) has not borne fruit. In early February, we had reported that EQT Partners and Global Indian International School (GIIS) had entered the bidding process.
“[It] seems like the discussion between buyers and sellers is still ongoing, as the buyer may want to lower its offer,” said an industry source.
Indies Capital Partners managing director Pandu Sjahrir says valuations are likely to have dropped by around 15-30 per cent based on the 10-15 per cent decrease in public equity and 5-18 per cent [drop] in local currencies across Southeast Asian countries. “[Education deals] have to do with the confidence of funds or investors, and the market has to come to some stability before any deals can be done,” Sjahrir added.
In the past few years, the average valuation for education deals was around 15-18 times EBITDA, which is considered too pricey, said Joseph M Mas, regional director at consulting firm EDT Partners. Those valuation expectations, however, were based on the sector’s stable profitability of at least 8 per cent per year, he added.
The road ahead: Allied sectors to see demand
The contours of the education sector have undergone a significant change over the past few months with consumers being forced to adopt the concept of online learning, thus increasing demand for allied sectors such as edtech, alongside traditional education.
“What we are experiencing now is a massive educational disruption that the world has never seen before,” said Kaizenvest’s Aneja.
Echoing the same sentiment, Mas added, “Even after the pandemic ends, the online-based education practice will be needed alongside the analogue-style education through online-merge-offline (OMO) system.”
According to experts tracking the sector, edtech firms that are riding on both B2B or B2C growth in the wake of the pandemic are likely to see significant traction and investor interest going forward.
“After a few quarters, the edtech sheen will reduce but settle at a higher level than today,” said Aneja, adding that those who can foster digital technology innovation will continue to attract more interest from investors.
But, it’s not edtech alone. Traditional education companies that manage schools will also be evincing investor interest, especially those that have a dire need of cash or working capital, said experts. Even international school operators are likely to witness growing demand in different countries in the region driven by factors such as rising household income and the urge to attend an ‘English school’.
However, the future will be tougher for supplementary education providers such as tutoring centres, if they do not move online quickly and effectively.
No matter what education segment they operate in, startups have a tough 18 months ahead. “The ones with the strongest balance sheet will survive,” said Sjahrir of Indies Capital Partners.