Given recent macro political uncertainty, particularly in the West, the ability to recruit international students has become more difficult, with a recent protectionist rhetoric from Western governments increasing the likelihood of visa issues. For those institutions that lack the critical mass to either maintain their own agent networks or invest in in-house recruitment teams, the use of recruitment software and specialist student recruitment businesses is becoming more necessary. These services can streamline and mitigate risks for schools to ensure access to the US and UK for foreign students. Therefore, finding the optimum mix of domestic and international students has become more important to operators and investors alike.
This is where domestic expansion, though producing a lower yield per student, may be a more resilient offering for investors. Local students are less likely to move, and more likely to go their entire school life in the same school. Schools with a largely domestic student body are less susceptible to macro-political downturns and tend to have a much more solid base of enrolment and progression.
International expansion has continued to drive M&A in the education space as international students continue to travel from their home countries with the promise of a Westernised education.
This is a trend that is expected to continue in the coming years as specialist recruitment platforms become a popular and cost-effective way of recruiting a high yield international student body for the UK and US. With the political environment outlined above school age students risk falling foul of visa issues, however, there is evidence that the inflow of international students benefits the UK economy by c. £20bn p.a., whether this will change in coming years remains to be seen.
An example of this is Gateway Education, a student recruitment business helping Chinese students attend private schools in the US and UK. Gateway’s services appeal to both the students, who gain access to a variety of schools otherwise unattainable, and for the schools themselves as using commission-based services becomes largely cheaper than in-house recruitment. DC Advisory advised the Gateway shareholders on an investment by Singapore-based investor, A-Star Education in 2017.
Adding Western education to the Asian market
While the largest international student market remains China, the Chinese domestic education market is increasing investment to mirror the social and education structures of Europe and America. Western school ‘brands’ are now part of a new market where historic colleges such as Harrow, Wellington College and King’s College are addressing the demand for British education in China. These colleges strip away the added cost and complications that come with attracting international students abroad, and they profit from the more reliable domestic market. Therefore becoming more desirable to international investors. The appetite of Asian investors to invest in strong brand names to bring back to the Chinese domestic market has led to a rise in recent years of cross-border deals, including Hong Kong-based Sailing Capital’s acquisition of UK-based sixth form operator, Astrum Education Group.
The biggest export of foreign students is seen from Asia and the Middle East, with more than 600,000 Chinese students now studying abroad. The number of Chinese nationals in foreign education companies is six times higher than it was ten years ago, driven largely by rapid cultural and economic growth in the Chinese middle class (defined by persons spending between $10 and $50 per day).
As illustrated in the above graph, in less than two decades, the size of China’s middle class has risen from less than 300,000 people to more than 500 million. With this trend comes sweeping economic change and social transformation and private education has become more accessible and increasingly common cultural passage for families in this income bracket.
This has driven expansion in higher education too, with investors looking to online English speaking tutoring and education services which have partnerships with universities in the area. An example of this is Northstar’s investment in Vietnamese Topica Edtech Group (Topica) for $50M in November 2018, one of the largest financings for an online education company in Southeast Asia. Topica allows universities in the area to offer live English speaking online degree programs, meeting the demand for quality Western education in Southeast Asia.
There is a similar trend appearing in India with rising disposable incomes which like China drives parents to increasingly opt for premium or International K12 education for their children. This has resulted in nearly double the number of premium K12 schools in India over the last four years and a c.50% increase in premium K12 enrolments over the same period. The increased middle class in India is comparable to the shift towards bilingual education that has been witnessed in China, with India poised to be one of the most important premium K12 markets globally in next five years.
Testing the technology theorem
It is not only China and India that are benefiting from software-based and online education. The future of tech-enabled education has changed rapidly on a global scale. Throughout history, technological and industrial breakthroughs have resulted in each generation having a different educational experience, however, with the introduction of Industry 4.0, the next generation could see the biggest technological jump of all.
Future technology in schools looks to provide students with tailored, job-readiness skills in a cloud-based environment. Children will learn in a virtual environment, competing and collaborating on a macro scale with other students. The first wave of this is only just beginning…
In this ‘first wave’ of digital education, the focus is on creating, sharing and accessing instructional content in digital forms (including online courses, digital libraries games and apps such as: Amazon Kindle, Coursera, Duolingo, etc.). In the near future, these one-off and stand-alone learning apps will become basic in comparison to AI and holographic technology being created for the classroom.
Introducing tech platforms to the Western education sector is slowly addressing the existing issues:
- The corporate skills gap – ensuring students are prepared with the right skillset to face the corporate world
- The view that education has a low return on investment – proving the worth of higher education when faced with high student debt and no guarantee of increased job prospects
- The need for innovation, entrepreneurship and job creation – macro-economic conditions are leading to a decline in job prospects and new firm growth, exacerbating the competitive effects of a global workplace
The integrated next generation technologies will likely be designed to make education easier for students from all backgrounds and of all ages, both in and outside of the classroom.
Technologies that can address these key issues and will be assets of interest to future investors, will need to:
This shift will come as educational institutions on-board tech companies that focus on connection, rather than providing lesson content. In recent years, more and more ed-tech software companies have received increasingly large financial backing from investors, both domestic and international alike, not to replace the teacher, but to aid them in creating a better learning experience for students that lasts from nursery to postgraduate studies.
Similarly, in India it is becoming very clear that the traditional college and university system is failing the students when it comes to employability. This has given rise to players like Eruditus, Great Learning, and Upgrad growing 100%+ year-on-year and becoming of genuine reference.
The scale of the opportunity and the necessity of the services these ed-tech platforms offer worldwide has caught of the interest of global tech giants in recent months, who are increasingly looking to education as a sector for investment and innovation. For example, Google acquired Workbench, a US-based developer of an education platform designed to provide project-based learning that helps in a variety of subjects in November 2018. This is a trend that is set to grow as other companies and investors see the worth and potential of ed-tech software to take education to the next level.
Regardless of a student’s age, the need to invest in technology is also seen as imperative by prospective students and parents. As other sectors move towards cloud-based structures, so too must education. A recognition of these trends has allowed early adopters in the education market to both reduce the cost of delivery per student, while improving the quality of education, and most importantly student outcomes.
Nurseries continue to put their hands up
As educational software companies receive backing to transform the education system for older students, in recent years the nursery sector has seen increased consolidation of the ‘nursery and pre-school’, from more traditional investors. The dynamics of the space, along with the multi-site roll-up opportunity, position the nursery industry as more and more attractive. Premium valuations paid for platforms of scale, along with interest from a range of financial investor classes and the industry consolidators continue to demonstrate this appetite.
One of the largest recent deals in the UK saw Busy Bees, one of the most prolific nursery groups in the country, acquire Treetops Nurseries in March 2017, which operated in 61 settings at the time. With the most recent acquisition seeing Busy Bees break into Ireland, having acquired 100% of the Giraffe Childcare from its shareholders, this deal means Busy Bees now operate 375 nurseries and provides childcare for more than 35,000 children. The continued trend of larger strategic players rolling-up smaller franchises is unlikely to change in coming years.
As such, the nursery sector is now being viewed as ‘social infrastructure’ as:
- Investors recognise the consolidation opportunity
- The obvious imbalance of supply and demand as an ever increasing number of working parents require nursery spaces for their children
- The ability to drive price increases
- The need for nurseries is unlikely to diminish
As such, some of the more operational, ‘core++’ infrastructure funds have started to look at opportunities in the sector, further increasing competition and therefore prices for the best assets.
Demand for high-quality education, both from domestic and international students is not likely to reduce, despite the best efforts of those in Westminster and Washington. However, what has become apparent in the last few years, is that in order to best capture the growth opportunities presented by an increasingly large middle class, and to insulate against macro-political and other existential downturns, ownership of as much of the life-cycle process is now paramount to education providers.
For schools and higher education operators, this will most likely entail increasing the quality of relationships with the most important international markets, either through direct relationships in-country (e.g. agent networks), through third party relationships (e.g. student recruitment businesses) or through coverage on the ground (e.g. sister institutions, partnerships or franchises).
For nursery operators, whose businesses are by their very nature more domestic, with investors increasingly willing to pay a premium for platforms the focus should be on:
- Quality of service and location
- Ensuring outstanding regulatory reports
- Operating in higher fee locations
In the face of an every changing education landscape, businesses need to monitor the quality and cost of delivery in order to attract investors and benefit from the rapid move towards macro connectivity.