Technology

Tested and resilient: education technology and services expansion fuelled by private capital

2021 Macquarie Technology Summit related insight


 

22 June 2021

Sector growth driven by technology and macro trends is attracting sponsors and institutional investors

There are now numerous examples of the acceleration of digital transformation across many if not most industries ushered in by the COVID-19 pandemic, but few have hit home as much as the changes within education. In early 2020, family homes suddenly became schools, offices and safe havens from a virus that wreaked global havoc and made group assembly a public health risk. Almost overnight, distance learning became the new norm in many parts of the world.

The rapid, pandemic-driven shift to learning from home has, however, perhaps simply accelerated a process the world was already capable of taking and a direction it was already heading in. Technologies and platforms that may have been considered “next gen” were thrust into application, and, for a large part, successfully deployed in a new and uncertain environment.

Certainly it’s true that a more mobile and technology-enabled education sector has, in fact, been under construction for decades. And as the pandemic emerged, education proved more mobile and adaptable than many realised was possible. The sector’s successes are both expanding the addressable market and grabbing additional attention from institutional investors.

“As difficult and costly as the COVID-19 pandemic is proving to be, it has clearly accelerated certain trends, with some of the largest being in the adoption of education technology and services,” said Sam Shah, Global Head of Software & Services at Macquarie Capital. “Education as an industry has shown remarkable creativity and flexibility in stepping up and partnering with public institutions to quickly form solutions. The tremendous innovations made by private education technology and services companies, which have been years in the making, position the sector well for further expansion as we move beyond the pandemic and continue to evolve education models.”

“As difficult and costly as the COVID-19 pandemic is proving to be, it has clearly accelerated certain trends, with some of the largest being in the adoption of education technology and services.”

Sam Shah,
Global Head of Software & Services, Macquarie Capital

Growth drivers of education technology and services

The driving forces behind education technology and services are diverse and backed by powerful societal trends. Some of these are outlined below.

Short-term:

  • Digital learning tools – such as interactive curriculum, student assessment and engagement solutions, which are seen as increasingly important to support student growth and now made possible by increasing prevalence of 1:1 device ratios in the classroom
  • Online content, which will be required due to social distancing initiatives or weather-related events that preclude students from going into schools
  • Intervention content and solutions, which will be increasingly important as students – particularly those without consistent access to reliable internet and devices – need to regain ground lost during the COVID-19 pandemic
  • Educational support services – such as counseling and enrollment management services, which are experiencing heightened demand at all grade levels
  • Online testing alternatives, which may be required to replace in-person examinations

Long-term:

  • Blended learning has become well accepted in post-secondary education and corporate training and is gaining traction in the K-12 sector. By 2025, it’s estimated that there will be half a billion more school and university graduates in the world than today, and current models will need to change in order to deliver at the scale and quality required
  • Demand for education services is strong in emerging countries in both K-12 and post-secondary education, driven by demographic booms, the rise of the middle class and the shift to service-based economies for many emerging countries that require improved levels of education and training
  • Rising awareness of the advantage of more education for lifetime earnings potential. In the US, there is, on average, a 75% wage premium for a worker with a bachelor’s degree relative to those with only a high school diploma, according to the US Bureau of Labor Statistics.
  • A majority of instructors at the primary and secondary and particularly the post-secondary education level, who were long hesitant to adopt online instruction, have become more comfortable with the digital delivery channel

An historically underinvested sector, but private appetite growing

Education has long been an economic cornerstone. At about 9 per cent, it is the second-largest sector in the US as measured by GDP, trailing only healthcare. The private sector’s contribution to date has been somewhat obscured by the large public component. But the capabilities shown by private education technology and services providers during the COVID-19 pandemic have shone a light on the growth that has been occurring for some time – as well as its potential.

As a sector, education technology and services has not attracted commensurate private capital for its size, importance and potential growth. The global healthcare market is $US10 trillion, and it attracts $US5 trillion in market capital. For comparison, the global education market is $US6 trillion and attracts $US150 billion in market capital.

There are signs that private investment in the sector is set to increase, though, as more financial sponsors are attracted by the growth drivers described above. An increase in private participation in education technology and services, including in public-private partnerships will be a key catalyst to future growth, innovation and access to education.

Institutional investors have taken note and are increasing the flow of capital into the sector. From venture capital alone, HolonIQ projects that $US87 billion will be invested in education technology companies between 2020 and 2029.

In some instances, acquirers are finding it more efficient to buy rather than build, especially when it comes to online education and digital companies. Niche operators in adaptive or personalised learning, data and assessment have drawn particular interest among acquirers.

In the first quarter of 2021, over 290 education technology M&A and capital rising transactions were announced, with about 70 per cent of those including minority investment by private equity firms, according to PitchBook. Transaction value exceeded $US4.6 billion, with 75 per cent from private equity investors (either as majority or minority investors).

“The increased interest of financial sponsors, venture capital and other sophisticated institutional investors is part of the growing recognition of the role private capital can play in the expansion of education services,” Shah said. “But we believe we are in the very early portion of this expansion, with room for private capital to help fuel innovation and offset a likely decrease in available public funding. This is why public-private partnerships are critical to supporting growth, innovation and increased access to education. The track record of innovation in education services is strong, products and services are expanding, and the sector will be able to take on private capital and drive performance.”

"The track record of innovation in education services is strong, products and services are expanding, and the sector will be able to take on private capital and drive performance.”

Sam Shah,
Global Head of Software & Services, Macquarie Capital

Technological innovation is key to sector growth

Private sector education technology and services providers are finding themselves much less in competition with public education systems than they are functioning as partners. Both prior to and during the COVID-19 pandemic, private virtual curriculum providers have been increasingly tapped by public districts to aid in delivering distance learning programs and services to public school students, proving that public-private partnerships can work well and address a societal need.

As with all industries, continued technological innovation will be key to the growth of education services, particularly education and training, with the main trends in the space including:

  • Digitalisation: Use of digital content and services facilitates cost effective solutions and broadens global opportunities
  • Personalisation: On-demand learning approaches made available at scale, such as adaptive learning and competency-based training
  • Innovation: New technologies entering the space in the forms of gamification and experiential/immersive augmented reality
  • Privatisation: Increasing access to education through increased choice and competition
  • Automation: Growing use of artificial intelligence, machine learning and big data

Higher learning

While the full legacy of the pandemic is still developing, it is already clear that education at all levels will be permanently changed. It will be more mobile, offer greater choice, be more adaptable and accessible, specialised and rely more heavily on technology than ever before. The acceleration forced by the pandemic should yield positive long-term societal benefits such as greater access, global connectivity, capacity and student retention.

Public education systems facing significant fiscal challenges will increasingly look to partner with private education services providers, who have demonstrated their capabilities in the most difficult times. With increasing visibility into the growth prospects and expanded capabilities of education services, private investors will deepen the flow of private capital into the sector, supporting the next wave of transformation in the way we learn.

Sam Shah
Global Head of Software & Services, Macquarie Capital

Sam Shah is a Senior Managing Director at Macquarie and leads the firm’s Software & Services franchise globally as well as US industry coverage efforts. He has over 20 years of experience covering Software and Tech-Enabled Services efforts. He specializes in Knowledge & Learning and Information & Data Analytics software companies and has completed over 300 transactions in those areas over the past decade. He leads a team of over 50 bankers in the US exclusively across multiple disciplines within software and tech-enabled services. Through Macquarie’s merchant banking efforts, he has assisted with numerous firm investments across the software and services space.

Prior to Macquarie, Sam was a Managing Director at Credit Suisse and led the firm’s education investment banking franchise. He received a degree in Electrical and Biomedical Engineering from Tufts University.

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