Despite a difficult deal environment in the education sector in 2022, there are a number of reasons to be bullish going forward for private equity investors, which account for some 50%-70% of the overall number of related investments.
Overall M&A volume in the education sector fell by roughly 15%-20% from 2021 to 2022, though it remained higher than the period before COVID-19. Transaction values, meanwhile, stabilized in 2022 to pre-COVID-19 levels after declining by 35%-40% from 2021 but have yet to fully recover, despite the increase in “mega deals” valued at more than $500 million over the past few years.
There were three key themes underpinning the M&A activity in 2022.
The first was a rationalization of valuations for education technology (EdTech) and a shift in focus to value creation. After peaking in 2020-21, EdTech investments now comprise some 60% of funding by volume. More than half of the investments have been concentrated in education services, test prep and tutoring, and adult and corporate training. About 90% of the EdTech investments in education services are made in companies working to digitize K-12 and higher education offerings.
The second was the continued leadership of North America, where deal values accounted for roughly half of the global M&A transaction value. North American education activity, which is driven by the U.S., saw consistently high transaction volumes and value, with 50% of it driven by education services companies offering supplementary academic learning and software to manage schools.
The third was a varying focus in developing (where test prep and tutoring saw the most investment) and developed (where corporate and adult training was the top investment choice) markets. Test prep and tutoring (about 46%), higher education (HE) (roughly 15%), and K-12 (approximately 11%) led investment activity in developing markets, as they have since 2020, whereas segments like adult and corporate training (about 27%), publishing (nearly 15%), and education services (roughly 15%) dominated developed markets.
M&A trends in 2023
Now, in 2023, there are a number of key themes in the education sector that we are bullish about, each of which fall into one of two buckets: the resilience of traditional education sectors and the continued disruption that EdTech brings.
Resilience of traditional education sectors. The first theme is the continued incubation of regional K-12 platforms, which are not only still emerging but also growing in scale, providing opportunities for consolidation.
Next up is the rebound in transaction activity in the higher education sector. Many assets in this sector were transacted prior to COVID-19 and may return to the market to raise more capital. And during the pandemic, online higher education saw its pace pick up due to the flexibility, personalization and cost-effectiveness it provides, which in turn creates an opportunity for investment in the space. Meanwhile, many traditional tertiary education institutes offering online degrees and pure-play digital campuses, which emerged on the back of online HE growth, could present opportunities.
There’s also a resurgence of transnational education taking place. Transnational education is a multidecade trend that has demonstrated resilience during recessions. Not only did the number of international students enrolled globally return to pre-COVID-19 levels by 2021, but the number of international students in leading study-abroad destinations is increasing and projected to grow faster than domestic enrollments (indeed, various countries have set recruiting targets for international students).
The continued disruption that EdTech brings to the sector. EdTech will increasingly bridge learning gaps. Various countries announced education stimulus packages to bridge the learning gap created by the COVID-19 pandemic. However, as evidenced by lower test scores in 2022, there is room for more improvement, which will be a continued focus for educators and policymakers going forward. Several subsectors — such as assessments, tutoring, special education services, teacher support and staffing — are expected to see sustained demand driven by the need to bridge the learning gap.
Training talent for skilled jobs is another key theme. In adult learning, trends include the shift toward online/hybrid delivery (through direct or enabled models); the shift toward soft and new-age digital skills, such as critical thinking, creativity, communication, collaboration, digital marketing, coding and artificial intelligence (AI), is another. A focus on the learning experience — namely a shift away from learning for the job to customized learning depending on learner needs — is another trend, as is the use of self-certification programs (e.g., the adoption of massive open online courses, or MOOCS).
Upskilling models such as collaboration with industry partners and the source-train-deploy system of hiring will be prevalent in 2023. And niche providers focusing on key industries, upskilling providers helping to bridge learning gaps and compliance-related training providers are among the investment themes that should be interesting in the short to medium term.
Finally, there is the increased role of advanced technology in education delivery. Advanced technology solutions such as augmented reality/virtual reality, AI and robotics enhance both the student experience and curriculum delivery, so operators emerging in this space will drive EdTech delivery models in the medium to long term.
To learn more about the opportunities for education deals in 2023, please be sure to download our analysis.
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