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A Look at 3 Hot Education Subsectors

Danielle Fugazy | June 12, 2018

The education sector often lags behind the business sector when it comes to adopting new things. That certainly holds true with technology. Education is just beginning to truly integrate technology — leading to a significant growth in M&A activity as investors look at technology plays in various education subsectors.

“Education has historically been slower to adopt technology, but there is growing momentum because of the improving effectiveness of technologies that support the education process. Educators are focused on improving outcomes for their students and technology plays a key role in that,” says Zack Sigal, a vice president with LLR Partners, which invests in education companies.

Here’s a look at three hot education subsectors.

K-12

There’s no question that technology is now being embraced in the K-12 education market. For students at many schools heavy textbooks are being replaced with digital books, bookbags with computer bags, and pen and paper with iPads. As a result of the growing trend to use technology to teach, reinforce lessons and allow better communication between administrators, teachers, parents and students; strategic and private equity investors are actively engaged in the subsector.

“Over the past five to 10 years there have been a dramatic shift in how K-12 students learn. This has been enabled by technology moving into the classroom,” says Alex Hicks, a director focusing on education services in the Dallas office of investment bank MHT Partners. “Everything is shifting toward the use of more technology.”

Strategic and private equity investors have been increasingly drawn to the sector as a result.

Case in point: the global game-based learning market is expected to explode. According to Metaari the market is expected to grow to $8.1 billion by 2022 from $3.2 billion in 2017, a 20.1 percent annual growth rate. The primary-education sector is estimated to represent a quarter of that market.

Investors in the education space feel strongly that the use of technology can enhance learning, improve outcomes, personalize teaching, and help educators assess student comprehension and proficiency in real-time. “We are in the early innings of technology adoption in this segment of the market and there is continuous innovation from entrepreneurs launching new solutions,” says Sigal. “Budget dollars are available for these types of solutions because districts realize the impact they can have. School districts are also facing greater competition from private schools, charters and other alternatives adding to the motivation to deliver great results and invest in technology that supports their mission.”

In September 2015, LLR bought IO Education, a software company that focuses on formative assessments, data analytics, and student performance—giving educators a holistic view of a student so they can figure out if a student is struggling and when to intervene.  

Investors also like this segment of the market because it’s sticky. “Once an institution starts using a product or service, they tend not to make changes unless absolutely service levels decline,” notes Lawrence Shagrin, founder of Millpond Equity, a private equity firm that invests in lower middle market business service businesses with a focus on education companies.

Some notable deals in the space include Francisco Partners’ acquisition of Discovery Education Inc. in the first quarter of 2018 for $120 million. Discovery Education is a provider of digital content, video streaming, and professional development for K through 12 classrooms. In April, Vista Equity Partners Management agreed to merge two education technology companies it owns, PowerSchool and PeopleAdmin, valuing the combined company at close to $3 billion.

Vista bought PowerSchool, which provides educational technology and online messaging technology to schools and parents for $350 million in 2015 from Pearson Plc. The technology-focused private equity firm has since spent more than $1 billion on PowerSchool acquiring eight other companies, including SunGard’s public sector and education business last year. PeopleAdmin, a talent management software firm based in Austin, Texas, was acquired by Vista in 2014 for an undisclosed sum. The merger will add back office capabilities and new human resources services to PowerSchool beyond classroom products.

“Parent messaging and engagement systems are growing in popularity due to the importance of parent involvement in the education process. There are a number of software platforms that make it easy for parents to receive real time updates on their child’s performance to see where they may be succeeding and where they may need additional support at home,” says Sigal.

Online training and compliance

The U.S. market for external training and development is around $71 billion, according to consulting firm EY Parthenon.  In the past, in-person training sessions and conferences constituted the majority of professional development and continuing education credits. However, companies have increasingly turned to online training products recently to save both time and money. Today, U.S. Companies are spending about $3.1 billion on e-learning training tools annually, according to EY Parthenon.

“e-Learning courses fit better into people’s busy schedules than conferences or classroom training and professionals tend to value continuing education resources provided by their employer as a benefit.  Making continuing education resources available also reinforces that the employer cares about the professional development of their workforce. There also tends to be cost savings with e-learning courses compared with alternatives and improvements in employee productivity due to reduced travel and time out of the office,” says Sigal.

In addition to the cost and time savings, online training typically gives trainees access to more materials through e-libraries that they can access on demand rather than at a specific point in time — a boon for employees with busy schedules. Unlike one-size-fits-all traditional education offerings, online products can be tailored for employees with varying needs. Lastly, as the U.S. government generally adopts stricter compliance standards, more training is needed to insure employees adhere to new regulations.

Private equity firms have remained busy in the subsector. In 2017, Blackstone Group and Canada Pension Plan Investment Board (CPPIB) teamed up to buy Ascend Learning for $2 billion. The Burlington, Massachusetts-based company offers educational content and online tools for students, educational institutions, and employers, with a particular focus on healthcare and other licensure-driven occupations. Also, in 2017 CVC Capital Partners’ announced the acquisition of QA, an IT education and skills business, for $886 million.

Additionally, there has been a hodgepodge of middle market deals completed by private equity firms in the space. Millpond Equity Partners’ partners  have invested in an number of online training services businesses including Hand-On Learning, which allows students completing college classes online to get science kits delivered to them so they can do the experiments necessary to complete course requirements.

“Online training is a very active sector given because there’s a lot of transition there. We are always looking for companies that deliver training more efficiently.  Also, online providers capture valuable data they can use to personalize learning and monitor usage” says Shagrin.

Macroeconomics is also playing a role in the growth of online training companies. With unemployment at an all-time low, employers want to retain their employees. “One way to do that is to invest in employees and help them further their careers by giving them opportunities to enhance their skill set. Studies have shown this is especially compelling for millennials. Also, employers are looking to upskill and re-train workers in the face of a rapidly evolving market and  they are using online tools do just that,” says Hicks.

Post-Secondary Education

Under U.S. Secretary of Education Betsy DeVos’ direction, there is a feeling that post-secondary education M&A opportunities will prosper in the near future. During President Obama’s years in office the Department of Education implemented tough oversight on the post-secondary industry. However, the environment seems to be thawing. Experts predict the U.S. Education Department will look to soften the gainful employment rules. Currently, in order to be eligible for funding under the Higher Education Act Title IV student assistance programs, an educational program must lead to a degree at a non-profit or public institution or must prepare students for “gainful employment in a recognized occupation.”

Since Gainful Employment (GE) Rates were first issued in January 2017, more than 800 programs at for-profit higher education institutions and community colleges failed to pass the required debt-to-earnings rate for graduates and are at risk of losing federal student-aid funding. Gainful employment rules are being reexamined today and new rules are expected soon. Once guidance is provided around the rule many expect to see a flurry of M&A activity, most likely occurring in the first half of 2019.

“The new rules aren’t out yet, but they are expected to be friendlier and are less onerous. We have shaken out the bad players and those who have survived should be well-positioned to grow in a more favorable environment,” says Hicks. “There is a waterfall of deals waiting.”

Although this segment of the market hasn’t been extremely busy, deal have still been completed. For example, at the end of 2017 for-profit operators Strayer Education and Capella Education Company agreed to merge in a deal worth $2 billion. Additionally, Colibri Group, a providers of leaning solutions to licensed professionals in real estate, healthcare, personal care, and other sectors, just bought Allied Business Schools, an online real estate training company. Capstone Headwaters advised Allied Business Schools on the deal.

Conclusion

As the migration to digital formats and delivery progresses, here is a real potential for transformation in the education industry. Experts expect this to continue to spur M&A now and in the future. “We will continue to take a broad approach to the industry and look for businesses that focus on helping institutions deliver better student results and develop   efficiencies in their operations. You will continue to see private equity firms and strategics looking for opportunities in the space.”

 

Axial is the deal network for the middle market.

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