Dealmaking in detention: Edtech investors call recess on M&A frenzy amid valuation revisions

Data InsightDealspeak 9 May

Dealmaking in detention: Edtech investors call recess on M&A frenzy amid valuation revisions

At the height of the COVID-19 pandemic, investors ploughed cash into edtech providers in a bid to capitalize on a shuttering of classrooms that forced students worldwide to take their studies online.

But now, with kids and young adults back in the classroom, financiers have revised their outlook on the sector and are subsequently deploying funds more cautiously – evidenced by a pullback in M&A activity at a time when red ink is being applied to valuations.

In 2020, when COVID-19 infected the brick-and-mortar education business model, a total of 40 edtech deals – including minority and majority investments – were executed across Europe, the Middle East and Africa (EMEA), according to Mergermarket data. The following year, once school gates reopened, this number dropped to 34. In 2022, the deal count slipped further to 31. So far this year, nine deals have been announced.

A five-year weighted run rate suggests that around a quarter of the year's deals are typically announced by this point. If the current trajectory holds, we could expect approximately 27 additional edtech transactions to be signed by year-end.

One small-cap auction that has joined the pipeline is Trainor, whose owner EV Private Equity is working with Houlihan Lokey on a sale of the Sweden-based online learning provider, as reported. Bidders admitted into the second round continue to do their homework ahead of the deadline for binding offers.

One of the largest edtech deals of the year so far in EMEA has been in Russia. With sanctions still very much in place, it was a domestic transaction, with VK Company [LSE, MOEX:VKCO] buying the remaining 75% stake in, an education platform, as reported.

Extra homework

Many edtech investors had chalked up billions in losses after deploying at sky-high valuations during the heady times before COVID vaccinations changed the course of the pandemic.

Take Byju’s as a case in point. In March, the India-based company, which has offshoots in Europe and was once the world’s most-valuable edtech, saw its valuation cut in half by BlackRock [NYSE:BLK], to USD 11.5bn from USD 22bn. Once the industry bellwether, Byju’s rapid fall from grace has taught edtech investors a hard but valuable lesson: the business model of today may not always be viable tomorrow.

Despite the need for extra homework, transaction volume in the edtech arena has proved relatively resilient given the bleak macroeconomic backdrop that has hampered dealmaking across the board.

“Edtech investment surged throughout the pandemic as new models such as B2C, parent-driven purchasing, language learning, online learning and tutoring all expanded dramatically,” said Patrick Brothers, co-CEO of HolonIQ, an impact intelligence provider. “Mega-rounds got so large that private equity started participating in traditional late-stage funding and more mature companies activated aggressive M&A strategies in partnership with financial sponsors.”

C-beams glittering in the dark

Generative artificial intelligence (AI) is likely to be a big theme for the sector in the not-too-distant future. New York-listed Chegg flagged the risks last week and its shares collapsed almost immediately.

“AI is going to have tremendous implications in education,” said Edward Slade, an education-focused corporate finance advisor. “It will potentially infringe on the intellectual property of educational content producers. We are on an uncertain trajectory where the value of knowledge has been debased.”

However, the emergence of generative AI is also likely to create new opportunities for investors. One example of a cash-hungry company thinking about AI in education is Dutch cybersecurity startup Hadrian, which plans to assess a Series A round of up to EUR 20m in the fourth quarter of this year, according to Mergermarket proprietary intelligence. The ethical hacker-led cybersecurity company, which provides automated security insights using AI, wants to target new segments like education.

No doubt, many entrepreneurs in EMEA are experimenting with generative AI education models. When they start seeking institutional money, we could expect another surge of optimism. In the future, the current drop in valuations might look like a mere blip on a long trend towards digitalisation.

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