The education sector encompasses a variety of different types of businesses—everything from secondary and training education to K-12 technology plays. In today’s macroeconomic environment where some unemployment is at an all-time low, some education plays are of more interest to investors than others. Despite different sub sectors coming in and out of favor over the years, the industry has grown substantially over the years.
According to Zion Market Research, the U.S. education market was valued at around $1.3 trillion in 2017 and is expected to reach $2 trillion by 2026.
“The sector has grown a lot. It’s much more mainstream today than when I got into it 20 years ago, and has a lot of different market players, both strategic acquirers and private equity sponsors who are interested in the sector,” says Bob Puopolo, a Partner with Epic Partners, a private equity sponsor that invests in the sector.
In 2018, transaction volume increased nine percent on a year-to-year basis. Strategic volume saw a three percent uptick whereas private equity backed volume gained 25 percent. Total value in 2018 declined slightly over 2017, from $16.81 billion to $15.52 billion. However, value more than tripled in 2017 over 2016, according to BerkeryNoyes.
For-Profit and Training Education
While enrollment in post secondary programs is historically low, a very few sophisticated investors believe now is a good time to pick up these assets. “Fifteen years ago, for-profit and vocational schools were the darlings of Wall Street. They were trading at 14-15 times EBITDA. Now they are radioactive,” says Puopolo.
From 2010 to 2016, for-profit enrollment fell 47 percent from 1.7 million to 915,000 students after ballooning from 403,000 students in 2000, according to data from the National Center for Education Statistics.
The reason for the decrease is two-fold. First, with unemployment at an all-time low, people are working instead of going to school. Additionally, these schools are highly dependent on the federal government to provide loans to students. Since 2010, regulatory scrutiny has ramped up making for profit a more complicated asset to own.
Buyouts of for-profit colleges hit a peak in 2009, according to PitchBook Data.
Epic takes the contrarian approach. “These businesses will come back so we are always looking. You don’t need a recession, but just an economic slow down and you will see them perk up. We are careful to focus on those post-secondary schools with strong outcomes and other regulatory metrics, but do like this space,” says Puopolo.
Firms like Sterling Partners, Leeds Equity Partners and Makena Capital Management have all invested in for-profit colleges.
Alex Hicks, a director at MHT Partners, says that he expects for-profit schools to become popular again with investors. “There will be renewed interest in the sector. There were bad actors in the space that have largely gone away. And the favorable employment environment threw the industry into the doldrums, but with the counter-cyclical business model of profit-education, investor interest in the sector is starting to increase. Training related to licensure and compliance programs are already white hot and will continue to be of interest to investors,” Hicks says.
Early education and childcare has continued to be in favor. The sub sector has a lot of tailwinds. “Valuations for these companies are extremely high right now. We like this area because there are societal trends that favor early education companies. Families don’t live as close to each other anymore and more families are transient, and so families with young children are less able to rely on relatives for childcare. Moreover, there are more two career couples than ever before. These trends make early childhood and childcare education more important than ever and very popular with investors,” says Puopolo.
Still, it’s important to note that these companies aren’t recession proof. “If a parent gets laid off, childcare is the first thing that goes, and so one has to be careful not to overpay and over-leverage these companies. The landscape has been littered with bankrupt childcare companies purchased at high prices with too much leverage during previous economic expansions,” says Puopolo.
Technology for K-12 learners remains of interest to strategic and private equity players alike. Last year, U.S. education technology companies raised $1.45 billion, matching the previous high for the single-year funding total of this decade, set in 2015. The funding total in 2018 also eclipsed the $1.2 billion raised by U.S. edtech startups in 2017, according to EdSurge.
Large strategic acquirers such as Pearson and McGraw Hill are itching to snatch up these companies. Earlier this year Pearson set aside $50 million to finance education startups with a tech bent.
Private equity firms are also interested in the space. For example, last year TPG Growth made a $130 million investment into DreamBox Learning, a k-8 math software developer.
Going forward Hicks expects investor interest in the education market as a whole to remain strong. “If and when the overall market enters recession, valuations for education companies will go down like many sectors, but for now, education M&A activity remains robust with strong valuations,” says Hicks.