Class Is in Session for Education Investors
As the school year begins, M&A investors find plenty of dealmaking opportunity in the education sector
A multifaceted space, the education sector includes niches from preschool through adult education that investors are embracing—even amid macroeconomic challenges and industry headwinds.
As educators grapple with the effects of the pandemic, they, along with investors and private companies in the sector, are keeping their eyes on emerging trends, like the rise of artificial intelligence in EdTech, as well as on challenges, including the ongoing issue of teacher shortages.
Like many other industries, the education sector has faced a decline in private equity activity this year since its peak seen in 2021. According to middle-market investment bank Berkery Noyes’ Education Industry Trends Report, released earlier this year, transaction value for the sector declined 34% between 2021 and 2022.
Even so, deals continue to get done as headwinds force education technology innovators and service providers to get creative with how to solve for shifting demands in education.
As educators grapple with the effects of the pandemic, they, along with investors and private companies in the sector, are keeping their eyes on emerging trends.
The Pandemic Effect
A rise in anxiety and depression among K-12 and post-secondary students, learning loss brought on by the pandemic, and demands from college students for more services delivered online are some post-pandemic impacts that have spurred education companies to offer novel solutions. This trend has given innovators new opportunities to support the sector.
“The pandemic showed us that you can have great learning and professional outcomes [for adults] by getting online degrees,” says Andy Kaplan, managing general partner for private equity firm Education Growth Partners.
In the K-12 realm, Kaplan says many schools are using funds provided by The Coronavirus Aid, Relief, and Economic Security (CARES) Act that was passed in 2020 to modernize and improve tech infrastructure, and to increase teacher training and students’ comfort with using technology.
For middle-market investors, school spending offers a tailwind for emerging education technology acquisition targets, even amid a decline in overall M&A activity.
Deals Getting Done
Those targets include companies like Uwill, which provides mental health and wellness solutions for college students. The company secured a $30 million investment from education-focused private equity firm Education Growth Partners in May.
Uwill CEO Michael London acknowledges that “the [M&A] market has come down from three to four years ago” amid inflation, creating discrepancies between what buyers what to pay, and what sellers want for their business.
Still, education investors are willing to shell out for the right target. While private companies may actively seek investment, London, for one, wasn’t looking for a capital investor until a good number—about 50—had approached him.
London says Uwill has chieved 9400% revenue growth since its founding in 2020, and now has relationships with more than 150 colleges and universities. Uwill is using the investment to beef up its sale force and increase marketing. “We’re going to be a $100 million company within five years,” London predicts.
Experts say other investment opportunities can be found in other niches within education technology, particularly in higher education.
Providing digital learning is expected by today’s college students, says Adnan Nisar, partner and co-head of knowledge and learning solutions for Chicago-based private equity firm The Vistria Group.
“A student at 2 a.m. who’s cramming for an exam may want to connect with a tutor,” he says. “They say ‘I’m paying all this money for this school, it should be part of my degree program.’”
Higher education isn’t the only area where investors should focus. Shoshana Vernick, managing partner of education and workforce investment firm Avathon Capital, sees investment opportunities from early childhood through adult lifelong learning.
“The whole spectrum is full of necessity and opportunity—when you have necessity, you have opportunity,” she says, citing early childcare centers as an example. She notes there are parts of the country where early childcare centers are few and far between. “There is a dislocation of supply and demand in that market,” she says. “Different regions are seeing build-out.”
Another niche attracting investment revolves around providing enrichment activities for young people. School of Rock, which helps aspiring musicians master skills, is one example of that. The company was founded in 1998 in Philadelphia with one school. Today, it has 336 schools in 15 countries and 60,000 students.
Chicago-based investment management firm Sterling Partners has invested in School of Rock several times since 2009 (Sterling declined to provide specifics of its investments). Last June, it reported on some of the franchise’s successes including current commitments to add more than 200 additional schools.
Sterling’s investment has proven wise, according to Avi Epstein, managing director at Sterling Partners. He says that School of Rock’s evolving culture, forging of new partnerships and targeting of new audiences segments, sets it apart from other franchisers.
Investors Do Their Homework
Making the right investments in education and workforce companies, Avathon Capital’s Vernick says, is about doing homework.
Education investors often work with advisors including state and federal policy-makers, K-12 school superintendents, regulatory advisors, university administrators and corporate chief learning officers—to name a few—to discover the needs within the marketplace and how fresh ideas and an influx of private sector capital can address them.
The skills required to be successful in a technology-driven economy are evolving faster than ever before, putting pressure on our institutions of learning and work to innovate. This creates a tremendous opportunity for the private sector to partner with schools and companies to ensure they have access to the best ideas and solutions.
“We listen to the problems that need to be solved and get advice [from these sources] on it,” Vernick says. “We identify founders and executives that are building businesses to address these issues and to bring innovation or efficiency to the sector.”
Related content: What is Private Equity’s Role in Higher Education?
Due diligence also requires an understanding of industry specific regulations. The education sector is regulated by various entities including federal and state mandates, accreditation rules, data privacy laws, and other regulatory issues. “Regulations can be good for investors if you understand them,” notes Education Growth Partners’ Kaplan. “It’s when you have uncertainty that’s difficult for investors.” He cites for-profit higher education programs that are currently subject to increased federal regulation as an example of a sub-sector that is currently less attractive for investment.
It also requires an understanding of the technologies disrupting and advancing the space. Artificial intelligence is one tech trend educators and investors alike are watching.
“It’s rippling through the sector as companies try to figure out whether it’s friend or foe to their business model,” Vernick says. “Either way, we know that the skills required to be successful in a technology-driven economy are evolving faster than ever before, putting pressure on our institutions of learning and work to innovate. This creates a tremendous opportunity for the private sector to partner with schools and companies to ensure they have access to the best ideas and solutions.”
Private companies also are working with K-12 districts to address the teacher shortage, which Vernick says has prompted public-private partnerships between education companies and K-12 districts on services that include teacher training, virtual learning and more.
For potential acquirers, a mix of industry challenges creating gaps for service providers, and technological innovation helping to fill those gaps, middle-market acquirers have an opportunity for solid dealmaking in a challenging M&A environment, while also making a positive impact.
“It’s an easy category to fall in love with and to get motivated about because you’re making a difference,” Vernick says.
Annemarie Mannion is a former reporter for the Chicago Tribune and a freelance writer who covers business.
Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.