Education is all the rage right now. Especially as parents wrack their brains on how to keep their children in check while schools throughout the world remain closed. As such, investors are now betting big on this captive marketplace.
Yuanfudao, the Tencent-back Chinese tutoring website, raised $1 billion on March 31 for its Series G fundraising. Hillhouse Capital led the round of funding, joined by Tencent, Boyu Capital and IDG Capital. Post investment values Yuanfudao at $7.8 billion, the highest valuation for a private education company.
The announcement follows the completion of the $535 million merger transaction between EdtechX, a special purpose acquisition company (SPAC), and Meten International Education, an English language training service located in China, which was announced in December 2019. The merged entity will operate as Meten EdtechX.
Avoiding the Secondary Market
While general investment sentiment has been subdued, online related business are witnessing a healthy pickup in interests. Both deals not only reflect momentum in the education space but also structures to avoid volatile secondary markets.
“It is difficult for any company to do IPO right now,” Paul Go, Ernst & Young global IPO leader told FinanceAsia. “We see even some large IPO deals in the pipeline and need to wait and see. And sometimes, look for alternatives.”
The CEO of EdtechX agreed: “As it is a little bit dangerous for companies to go for IPO right now, so SPAC offers a second choice” Benjamin Vedrenne-Cloquet said. It appears to be a good opportunity to deploy capital, “I am expecting to see more SPAC transaction to come,” he added.
SPACs are entities without commercial operations, designed for the purposes acquiring other companies.
Web-based tutoring and education services have demonstrated resilient demand, with companies looking to utilize the pandemic to raise private capital.
For EdtechX, merger and acquisition might be faster, but the “ambition is to grow organically but also through consolidation,” Vedrenne-Cloquet said. Meten Education acquired study abroad agency HoldEdu in 2015 and children English education platform Beijing ABC in 2018.
Adult English education contributes 60% of Meten’s revenue while child education contributes 10%. Online education and overseas training account for 10%, respectively. Vedrenne-Cloquet said that they will likely use the proceeds this time to expand their online education sector given that more are likely to stay indoors later.
But Need a Comparative Advantage
Online education in China is projected to exceed Rmb450 billion ($63 billion) with more than 300 million users by 2020, according to Chinese market research firm iiMedia Research, with a near-term growth rate of more than 16%.
Optimism is well placed for those with a strategic edge. Yuanfudao, which recorded more than Rmb3 billion in sales in 2018, boast a massive user base of 400 million. With 80% customer renewal in the primary school sector, the group believes it can hit Rmb10 billion in sales for 2020.
The group’s brand equity was evident after Yuanfudao ranked first in-app purchase in education between January and March, according to mobile app performance tracker App Annie, when schools closed.
But while the market will continue to grow, success is not guaranteed.
ByteDance, the $90 billion the start-up behind TikTok, is exploring early stage education businesses. It launched English tutoring platform Gogokid in May 2018 and paid content Haohao Xuexi in at the beginning 2019.
Though well positioned in algorithm than other starts up, the entertainment-oriented platform has already been cutting staff at Gogokid due to higher acquisition costs for students, highlighting operating challenges.