Rory Nath recently sat on the panel for EducationInvestor Global’s webinar, ‘Shelter from the storm: investing in education amid the Covid-19 pandemic’. He joined Derrick Betts from EY-Parthenon, Jamie Edge from EY and Sam Fenton-Whittet from Oakley Capital, to consider the short and long-term outlook for investing in the sector in the wake of the current crisis.
If you want to listen to the full recording of the webinar it is available here. In this article, Rory pulls together some of his key takeaways. Specifically, he highlights the sub-sectors in education that are likely to hold the best investment opportunities in the current environment:
Shelter from the storm?
As the world scrambled to find its feet in the wake of the pandemic, deal volumes in the education sector stalled after a record peak in 2019. This panel was an opportunity to take a step back and consider where deal makers should focus their time to reverse that trend. In my view, there are reasons to be optimistic. A number of sub-sectors within Education have shown exceptional levels of resilience over the last few months. The desire to learn, and to educate, are among our most fundamental of needs. Technology that supports that need has become more critical than ever and we have met several businesses that have experienced a surge in demand.
That said, there is no true ‘shelter from the storm’ in the here and now. Whilst investors such as ECI are still looking actively to invest in Education, we also need to work hard to navigate new challenges – remote due diligence, building relationships virtually and a nervous debt market, to name a few. All of those are addressable for creative and motivated minds.
Perhaps most importantly though, we need high levels of conviction in investment decisions during a period of significant uncertainty. That will happen where the short-to-medium term impact of Covid-19 on the business is low (or even positive) and the business is well positioned to capitalise on long-term trends in their market (that Covid-19 may have accelerated). Education is a great sector to look for opportunities that pass both of those tests.
We would love to talk to any owners of education businesses, but we think there are three areas that are particularly exciting for investors and sellers alike in the short-term.
1. Running a school in the cloud
Whilst state school budgets remain well insulated from Covid-19, schools have had to adapt to operating in a rapidly changing and often remote working environment. Well-established ways of working that were adequate in normal times have been under immense strain. Some teachers have suffered reduced access to critical management systems that remained hosted on-premise, whilst pen and paper processes risk breaking down entirely. In either case, shifting to cloud-based solutions improves access and efficiency for teachers, which in turn delivers better outcomes for students. Covid-19 will accelerate this migration to the cloud, creating investment opportunities.
Ensuring that schools can maintain their safeguarding standards is one such area. ECI portfolio company, CPOMS, is a provider of safeguarding software that makes it easier to track and report child protection, wellbeing and mental health issues. With students being split between home and school, collaborating effectively to ensure all children are safe and well is more critical than ever. Teachers with CPOMS are very willing to say that they could not live without it at this time (see CPOMS’ Twitter feed for examples). Many other teachers are still relying on paper trails or messy excel spreadsheets for safeguarding; to support them and the children in their care, we’re offering them CPOMS for free until September.
School leaders have also had their bandwidth stretched as never before. It is therefore very telling to see which businesses they have been relying on for products, services and expert advice to digitise their school’s administration. In the UK this brand strength is of immense strategic value for two reasons. Firstly, procurement remains very fragmented, so inbound enquiries and referrals are the most efficient route to scale. Secondly, there is still an open playing field to become the leading platform for consolidation of UK education technology. We see a significant opportunity to lay claim to that ground in the coming months for businesses that have demonstrated the value of their market position during this crisis.
2. Engaging with corporate e-learning
Learning Management Systems (“LMS”) are already ubiquitous in corporate settings, but corporate e-learning is also a rapidly evolving market. There is a well-established trend towards providers who can demonstrate true user engagement and business impact, rather than buyers just wanting to ‘tick the box’ for specific training requirements. Corporates are increasingly willing to invest in user experience and high-quality content. Some providers have pivoted functionality to focus more on the user than the administrator, for example by integrating social media functionality and investing in technology to support personalised course recommendations – the rise of the Learning Experience Platform (“LXP”). With Boards everywhere focussing on keeping their employees engaged during Covid-19, there could be a bump in demand for these platforms in the short-term. We can expect with more certainty an acceleration of this trend in the longer term.
In a large, highly fragmented market, businesses also need to be able to clearly define their target customer and points of differentiation. Bringing enterprise-grade technology and high service levels to the mid-market? Distributing content at scale whilst controlling quality through in-house production? Owning a vertical with deep sector expertise? If it is very clear why you win new business, then it is more likely that a growth investor will get excited by the opportunity.
At the same time, this is a period when resilience of market demand will be tested. Strong trading momentum is the best remedy to remove doubt, but generally businesses with a combination of the following factors will be the most attractive to investors right now:
3. Taking Higher Education online
Lifelong learning has always been important for professional development and personal fulfilment, but online providers are making this both more accessible and more visible. It is already a very well invested space, with much fanfare around recent fundraises for the Massive Open Online Courses (“MOOCs”) such as Coursera.
Why are investors interested? Because there is still room to win out in niches for businesses that are taking higher education online through Covid-19.
Firstly, the market demand for professional qualifications (both self-funded and employer-sponsored) is robust and now is the time to shine for online pure-play providers. Versus traditional providers, online businesses have always benefited from lower operating costs, but there have been question marks over what could be lost in course completion rates and satisfaction without face-to-face interaction. We’ve now had a period in which businesses and individuals have had to turn to online learning out of necessity, and the effectiveness on virtual interaction has been proven out in many facets of our lives. The impact of Covid-19 could cement a structural shift in the delivery of professional qualifications that online pure-plays are well placed to benefit from.
Secondly, many B2C distance learning providers are experiencing record demand – we have all had time on our hands. Whether hobby learning or career building, it is going to be difficult to determine to what extent the Covid-19 bump in sales is sustainable. Businesses should look for ways to evidence this through retention metrics and forward-looking KPIs for demand (e.g. enquiry levels). Investors will also need to understand the unit economics – how does your cost of customer acquisition compare to lifetime value? Putting both together, businesses in this space can emerge from the crisis demonstrating both high growth and sustainable profitability.
Finally, there will always be demand for bricks and mortar higher education, and some private universities (and other institutions) are proving themselves to be more successful than peers in delivering in mixed media (online / offline). These providers will look more attractive to future student enrolments and more scalable versus others who remain heavily reliant on their physical infrastructure. Investors will be interested to see where businesses have been able to demonstrate effective use of technology to continue educating their students through Covid-19. This will be reinforced by a positive market context for those focussing on subject areas that are deemed to be essential for a recovering economy by both governments and student populations.
If you would like to talk about the opportunities that lie ahead for your education business, please get in touch with rory.nath@ecipartners.com
