Private equity goes back to school

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White & Case LLPThe global response to the pandemic, including unprecedented vaccine rollouts, appears to have energized the private equity industry. The second quarter of 2021 saw the highest value figure on record: US$418.3 billion (including secondaries).

This year as a whole is likely to post a record in terms of value—with five months still remaining, it is already within touching distance of 2007’s high, when the total topped US$1.1 trillion.

PE firms are competing, and beating many of their corporate rivals at auction. They’re also sitting on a record US$1.6 trillion in dry powder, according to research group Preqin.

As schools locked down and learning went online, buyout firms turned their attention to education and, in particular, the converged sub-sector of education and technology: edu-tech. In all of 2020, the top 25 education buyouts totaled US$14.1 billion. In the first half only of 2021, firms already spent US$10.5 billion on the top 25 deals, with half a year to go.

While the upward trend in education was present before COVID-19 took hold, the pandemic revealed education as a resilient sector, one with strong prospects for future growth. The US, India and China have led the way by number of deals, but activity was also seen across western Europe as well as in Brazil, Australia and New Zealand.

The future of the private education market in China is a notable focal point for domestic and international investors in light of recent regulatory developments, and we fully expect that a new way forward will spur activities in the market and create opportunities that will adapt to the evolving regulatory landscape.

King of the Hill

Deals in 2020 and through the first half of 2021 have been concentrated in the lower and middle markets—the bulk below the US$500 million mark.

But that pattern was punctured by Platinum Equity’s US$6.4 billion acquisition of McGraw Hill. The deal not only was the biggest deal of 2021 so far but also hit far higher than last year’s biggest transaction, the US$2.5 billion sale of US Providence Equity Partners’ majority stake in French higher-education provider Galileo Global Education to a consortium that included Canada Pension Plan Investment Board and UK-based Montagu Private Equity.

Other notable deals in H1 included Blackstone’s sale of Aakash Educational Services to Byju's for US$1 billion, India’s largest edu-tech deal to date. Although Blackstone sold its stake, it will continue to be a shareholder.

Although the US and India recorded the largest transactions, Bertelsmann further cemented its position in Brazil’s fast-growing education market. The German-based publisher bought a 25% stake and 46% of the voting rights in Afya, the leading provider of medical education and training in Brazil, for US$608.7 million. Bertelsmann already had a connection with the company, and bought the shares from Crescera Capital, which launched the Crescera Educational II fund in 2014 with Bertelsmann as the main investor.

A new balance

Although education companies may welcome the entrance of PE firms, concerns have been raised by those working in the industry over cost-cutting and the potential for rapid exits. But industry insiders also recognize that PE brings much needed capital and support for the innovation required to develop new products and services to meet a growing and evolving educational demand.

The October 2020 Citi report—Education: Fast Forward to the Future—reveals that the sector has been slow to adapt, and spending on technology in the US represented only 3% of the sector’s collective budget in 2019. But the pandemic shook the sector to its core, and expectations are high for an expenditure rebalancing between traditional and digital learning.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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