Education Technology M&A and Capital Raising Trends: Highlights From ASU GSV Summit

Thursday, May 26, 2016

On the heels of this year’s ASU GSV Summit, it is clear that the education industry continues to be in the midst of a massive phase of technology-driven disruption. At the April 18-20 conference in San Diego, more than 3,700 educators, investors, executives, and entrepreneurs met to discuss how technology is reshaping the education landscape.

During the conference, we had a chance to meet extensively with over 50 senior education executives, founders of innovative companies, business development professionals from strategic acquirers, and venture capital and private equity investors that are focused on the education and education technology industries. Based on those conversations, we discuss four of the biggest trends affecting deal-making and capital-raising activity in education technology.

TICMAY2016_attend



Outsourced Program Management Continues to be a Hub of M&A Activity

The rapid growth of online post-secondary education over the past decade has created robust demand for outsourced program management (OPM). From the 2003-2004 to 2011-2012 school years, the percentage of undergraduate and graduate students taking online or distance learning courses more than doubled, according to the National Center for Education Statistics. This growing demand for online education has led to several high-profile acquisitions involving OPM providers, including Pearson’s $650 million acquisition of EmbanetCompass in 2012 and John Wiley & Sons’ $220 million acquisition of Deltak.edu in 2012. In addition, leading OPM provider 2U launched an IPO in March 2014 at a valuation of over $500 million.

Based on conversations we had at this year’s conference, it is clear that OPM providers will continue to be a hub of M&A activity over the next several years. The industry currently contains many providers of targeted solutions, and most of the OPM providers we met with discussed how they are looking to expand their offerings to cover the entire student lifecycle—from marketing and enrollment to student retention and career services. This push toward more full-lifecycle solutions should help continue to drive M&A activity among OPMs.

TICMAY2016_dist_ed



Assessment as the Driver of Innovation

Over the past decade, metrics and measurement have been at the heart of most conversations about innovation in education, and interest in assessment has only accelerated in recent years. Many of the presenting companies at this year’s conference focused on their ability to apply assessment and data analytics to their solutions.

Across all levels of education, institutions are looking for ways to use data-analysis to inform their pedagogy and improve student outcomes. Educational institutions, from K-12 through graduate-level programs, are focused on using real-time student assessment and adaptive learning technology to create customized learning experiences for each student. High schools are looking to use data analytics to improve the college preparation and college placement processes. Post-secondary institutions are using adaptive learning to increase student retention and graduation rates. This trend is also playing out in the corporate setting, where companies are implementing more thoughtful skills assessment and creating training recommendations that are targeted to each employee’s individual aptitudes and performance. Notable transactions in this space include TPG Capital and Leonard Green & Partners’ $3,500 million acquisition of Ellucian in 2015 and Hellman & Friedman’s $1,100 million acquisition of Renaissance Learning in 2014.

Increased Focus on Career-Specific Skill Development

Much of the innovation and growth in the education industry is happening outside of the school or university setting. Numerous skill- and career-oriented programs have emerged to help bridge the gap between the knowledge that students graduate with and the specific skills that employers need. The common theme with all of these programs is that they have a very clear focus on ROI and are specifically designed to help professionals get from point A to point B in their careers.

Some of these programs, such as crash courses in coding, data analytics, or graphic design offered by General Assembly and others, are designed for students looking to enter the work force or professionals looking to change careers. Other programs are designed to help professionals keep their skillsets relevant in a time when the half-life of knowledge is constantly shrinking. Examples include micro-badging and certificate-based modules, such as massive open online courses (MOOCs) offered by universities, and corporate training programs that are designed to keep employees up-to-date in rapidly evolving fields. This increased focus on career-specific skill development and training has been the driving force behind several prominent M&A transactions in the education industry, including Bertelsmann’s $540 million acquisition of Relias Learning in 2014 and LinkedIn’s $1.5 billion acquisition of Lynda.com in 2015.

More Education Technology Companies Reaching Sustainable Business Models

As the education technology industry continues to mature, more companies are moving beyond the proof-of-concept stage and are developing sustainable business platforms with better-defined revenue models and increased scope and scale. This increase in scale is illustrated by an increase in the number of capital raises and acquisitions over $15 million (29 from 2013 – 2016YTD compared to 10 from 2010 – 2012, according to data from S&P Capital IQ). As this transition occurs, companies are beginning to focus more on revenue and profitability, in addition to growth.

The shift in focus is being driven by the industry’s natural maturation, as well as by a valuation environment that has become increasingly challenging over the last 12 months. For publicly traded education technology companies, median LTM revenue multiples have dropped from around 1.3x in April 2014 to around 1.0x in April 2016, according to data from S&P Capital IQ. In addition, the number of late-stage venture deals in Q1 2016 fell 16% and total capital invested fell 21.6% year over year, according to data from Pitchbook. As valuations have fallen and private companies find venture capital funding harder to come by, funding growth externally has become a more expensive and more dilutive proposition. In this environment, companies increasingly are focusing on efforts to fund their growth via internal cash flow, if possible. Down the road, this should provide these companies with more viable paths to generating liquidity either through acquisition or by going public.

TICMAY2016_trns



Download report PDF


To learn more about these and other trends that are shaping the education technology industry, please do not hesitate to contact us.

More about our Services Investment Banking practice


News Alerts

Stay connected to your favorite publications and news features.

Subscribe Now