Investing in education: Is now a good time?

Luke Pais (Luke):

Welcome back to Money Multiple, where we explore trends, topics, and pathways for private capital investors in Asia to deploy capital and maximize returns. In this episode, we will dive deeper into the education sector in Asia, which is a very important and exciting opportunity for private capital.

Asia is home to some of the world's fastest growing economies with an aspirational and growing population of 4.5 billion. Mega trends such as urbanization, rising middle class, globalization of the workforce particularly in the services sector, and the impact of technology are driving demand for high quality education.

In recent years, the education landscape has seen significant evolution. Digital and online learning, as well as the emergence of regional and global champions, particularly in the early years and K-12 segments, are two trends of note. There is a growing focus on continuing education and lifelong learning. On the other hand, governments need to navigate important issues such as access and affordability, holistic development, as well as funding, which means that investors need to be aware of an ever-evolving regulatory landscape. To navigate this interesting topic, I am pleased to be joined by Abhinav Mital, Managing Director of Linc Education Services, and Rishi Gajendra, EY Education Sector Leader for Southeast Asia.

Rishi, let me start with you. Can you take us through where the transaction activity is and what are the markets of interest for private capital as we look to 2023?

Rishi Gajendra (Rishi):  

Sure, and thanks for having me on this podcast, Luke. Let me set the context with a few data points to help us with this. In 2020 and 2021, the total deal volume in Asia-Pacific (APAC) for education and EdTech was about US$15 billion and the three largest markets comprising that were China, India and Australia. These two years were all-time highs, and the corresponding number in 2022 was about US$6 billion.

It's worth calling out that historically about 60% to 70% of the total deal volume in the APAC region was in China, but the regulatory changes that occurred around 2020 have certainly impacted that. Over the last one to two years, that 60 to 70% has decreased to about a third of deal volume coming from China out of the total in the APAC region.

Beyond the big three markets, it is important for investors to track a few other markets – Vietnam, Malaysia, and Singapore come to mind. Vietnam, for example, has witnessed the emergence of multisector education platforms, large education companies that operate in segments such as schools, universities, and the EdTech sector. Malaysia, on the other hand, for about a decade, has seen private equity investment in universities as well as K-12 schools. Singapore presents pockets of opportunity for investors to track and keep an eye on. It is perhaps the most well-developed education market in Southeast Asia.

Luke:    

Thanks, Rishi. So, it looks like there are a few pockets of opportunity to invest in across the region. It's interesting that you mentioned regulations. Can we unpack that a little bit? What are some of the recent changes in the regulatory environment in the APAC region?

Rishi:    

Sure Luke, and certainly regulations and policy play a very important role in influencing the sector. We've seen this play out in the China market where a ban on for-profit operations in after-school tutoring impacted the sector significantly over the last 18 to 24 months.

But let me pick a few other examples to outline this. It's worth acknowledging that there are markets and geographies where regulations are favorable in terms of for-profit operations, and foreign investment. Examples are Vietnam and Malaysia, where all education sub-sectors are open to foreign investor participation and for-profit operations.

Contrasting that is Indonesia, where for-profit, K-12 and higher education has not been historically allowed. But we've seen changes in the tertiary sector over the last four to five years and currently, foreign branch campus setup is permitted subject to certain restrictions: them being located in special economic zones, and of course the university that sets up the campus needs to be in a certain tier of ranking.

In terms of more recent changes, I think India is certainly a market that has seen a fair bit of regulatory and policy changes. The National Education policy was released about a year and a half ago, and there are several changes in that policy, which are positive for the sector. The emphasis on earlier education – pretty ambitious targets as far as school participation concerned – and on critical learning rather than rote mugging, are all welcomed changes to the policy.

I think the last point is on the EdTech sector. In the Indian context, the education ministry came out with a guideline or in fact a warning essentially, about student financing schemes, aggressive ad campaigns – essentially any mechanism to attract new customers and parents, and they've asked the EdTech companies to curb these unfair practices. In response to this, the EdTech organizations have organized themselves quite well and responded by highlighting that they are taking steps to curb these practices. In summary, regulations continue to be important. We do track the changes in regulations across markets so that we can give the right advice for private investors in this space.

Luke:    

Now, let's shift gears and talk about the various segments of education starting with K-12 schools. How has this segment evolved and where do you see the growth opportunities?

Rishi:   

Sure. Look, historically with respect to K-12 schools in Asia-Pacific, growth has been through premium or high-priced international schools. Essentially, these schools targeted expatriate families and wealthy locals, and we have seen that play out over the last decade. Over the last two years, an interesting change is that there is the increased prevalence of bilingual and dual-curriculum schools. These operate at mid-market price levels, and the target segment here is mid- to upper-income locals who aspire for globalized education for their children and a pathway to overseas higher education once they finish school. So, we see this as a continuing trend and growth of these bilingual and dual-curriculum schools across emerging Asia is a trend to stay.

Markets such as Vietnam, Indonesia and Thailand have all witnessed these sorts of bilingual and dual curriculum schools and this will drive the next wave of growth. I think it's worth mentioning that there are still pockets of growth opportunities in the premium segment as well across markets, but the majority of the growth is likely to be in the mid-priced and dual-curriculum and bilingual segment.

Luke:    

Abhinav, your business focuses on the tertiary segment. With borders now fully reopened, how are international student flows trending and how does it impact the higher education segment?

Abhinav Mital (Abhinav):           

Hi Luke. After a couple of really tough years, the international student market has resurged in the second half of 2022 going into 2023. For example, student numbers are back up in many markets. Like in the UK, the numbers are actually higher than what it was in 2019. Many other markets like Australia, Canada, US are seeing numbers coming close to the 2019 levels. What it has done is that it has effectively given a shot in the arm to a sector, which was otherwise stagnating. What has also happened during this time is that the profile of demand has shifted away from China and more toward the Indian subcontinent, and the South Asian market. And 2022 is a landmark year, because for the first time, subcontinental students have become the largest incoming cohort or student community in all of the key markets like Australia, UK, Canada, US. At the same time, universities are also looking at the region – Southeast Asia, South Asia, and other parts, more closely to see what they can do in-country because they feel that’s a good hedging factor or a hedging opportunity to have some operations within these countries as well.

So, overall, this 2022 resurgence has shaken up the sector, it has given a fresh boost of life, and it has also given birth to some interesting business models in the space of student recruitment, student enablement, as well as partnerships for program delivery in the space that we operate.

Luke:    

Now, EdTech was front, back and center during the pandemic, but we have seen a cooling off in 2022 as physical classrooms have resumed. Can you unpack the various segments of EdTech and what has been the impact on each of these?

Rishi:   

Sure. We use the term EdTech as an umbrella definition of tech-enabled solutions catering to the education sector. We categorize it into three parts. Number one is technology-enabled solutions, targeted at educational institutes, essentially B2B (business-to-business) solutions for schools, universities, learning centers, etc.

Number two is the K-12 EdTech platform or the school-age EdTech platforms, targeted at school-going children, either through content or through delivery of classes online. And the third category is essentially higher education and upskilling-related EdTech, which are online programs targeted at college young adults, as well as working professionals.

Now, with respect to valuations, that two points to keep in mind. Number one, 2020 and 2021 saw a heightened amount of deal activity in the EdTech space. As a result of that valuations increased dramatically in many cases, and over the last year or so, we are seeing correction to what was built up through the COVID-19 years.

The second point, however, is perhaps more relevant and important, which is that there are certain business models in the EdTech space that benefitted through COVID-19 pandemic. A great example of that is K-12 EdTech. During school closures and lockdowns, many families preferred to send their children to online programs. But over the last nine to 12 months, with in-center or in-classroom learning resuming, we have seen certainly a slowdown in adoption of these online classes and a recalibration of growth expectations, and they've been acutely impacted in many instances in terms of funding and their growth trajectory. So, if you break up the various segments of EdTech, it is this one, the K-12 EdTech segment that has been impacted the most in terms of valuation.

To some extent, the correction we have seen in valuations is also a function of what is seen in the wider tech landscape. Over the next one to two years, it would be interesting to see how things pan out for the other segments where there's still a fair amount of investor interest and activity and growth as well.

Abhinav:            

And just to add to that, I would say the other two categories that Rishi pointed out, which is the B2B solutions that could be in the form of student management systems, in-classroom technology, learning management systems, even content-based – in-school content or in-university content-based  solutions. I think those segments have a lot of potential and will continue to grow because what COVID-19 pandemic has shown is the increased need for digital infrastructure and all formats of education. So those segments are very positive. Tertiary education has definitely embraced the changes brought by COVID-19 and has actually continued with it – opening up and using technology to create a new and faster growing student target market, which is among the continued learners and the professionals. They are even using online mode of delivery for enhancing the experience of more traditional school leavers who get into university, either as an international student or a domestic student.

So, these segments continue to be still enjoying some of those benefits of accelerated adoption of technology during COVID-19 pandemic. But yes, I think Rishi's point on the K-12 sector specifically in those targeting students directly, that is a segment that will be a bit more challenged.

Luke:    

It appears that these are challenging times. Abhinav, as an operator in the sector, what has been your experience and what in your mind are the key focus areas for management teams in EdTech?

Abhinav:            

I think that’s a great question, Luke. To my peers and colleagues in the industry, I would say you need to go back to the fundamentals of building solid business economics and not looking at funding and valuations as a source to survive, but as a source to grow. Now, what does that mean? It means that your underlying value proposition to your customer, which in this case – students, should be a great experience, a rewarding experience for them. But at the same time, you are able to drive value from those services. That means your customer lifetime value has to be a number that can support the economics of your cost of customer acquisition and delivery. A lot of business models have come up where the revenue or the fees or the customer lifetime value has been substantially subsidized, thanks to fairly free capital that was available, and a lot of money was being invested in acquiring customers. If you are such a business, you will have a tough time going forward. Businesses that have managed to reduce their cost of customer acquisition, at least to below 50% of student value or revenue, have a chance of survival. Otherwise, it’s going to be a difficult journey forward for them.

Luke:    

Rishi, I wanted to talk about a currently hot topic, which is how artificial intelligence will change the world of education. ChatGPT has taken the world by storm. Enabler or killer?

Rishi:   

Certainly, that’s a very topical question, given what you’ve seen over the last few months. Perhaps it’s a bit early to comment on whether educational institutes are going to embrace this and integrate it with their curriculum plans, or they will look to enforcing limits on the usage of tools such as ChatGPT. If I was to take a step back, education is ultimately about the interaction between teachers and students. Even before the advent of generative AI (artificial intelligence) technologies, basic learning content was and is free, available for free or at a very low cost on the internet in a variety of mediums. So, to that extent, in the current stage, I will attempt to take a stand and highlight that ChatGPT will enhance the quality of learning. It’ll help and act as an aid for both learners and educators. It’s hard to imagine a scenario where it’ll be a killer to the education or the EdTech sector.

Abhinav:            

Well, I’ll add to that, is that it’s definitely made things very interesting for operators like ourselves and our university partners because this technology currently is free format, free to use, and it means that we need to ensure it is not being used in the wrong fashion or giving unfair advantage to students. So, that aspect of technology also needs to be considered. This is very new, right? I mean, three months old, four months old. But I think responsible use of artificial intelligence and related technologies is the need and that is what will help enhance the quality of learning rather than create further distortions. Because if these technologies are being used in an unfair fashion, it’s not benefiting the students and it’s not leading to the design outcome in education. So, I will just add that one comment to what Rishi just mentioned.

Luke:    

Abhinav and Rishi, it’s been a pleasure to have you both on. Before we close out the session, what is the one piece of advice that you would give our audience?

Rishi:   

Education as a sector and EdTech as well, in these times of macroeconomic uncertainty, I do believe that it presents an attractive opportunity for investors. Let me substantiate that with two examples. Number one is schools or K-12 platforms, these have traditionally known to be resilient to contractions in consumer spend and to high inflation environments. The second example is higher education, which in many cases, and to an extent, upskilling as well. In many cases, these segments have been countercyclical to economic downturns. They have performed well when the overall economy has not performed that well. All things considered, there are certainly many pockets of opportunity for investors to spend time on identifying the right segment and the winning business model and operator to back in these times as well.

Abhinav:            

From my side, I sort of reinforce the point. Education is one of the few sectors that is counter-cyclical. If you are an investor or an operator looking to expand in this sector, this is as good a time as any. It has that capability to withstand turbulent economic times, and of course, I would go back and point out that the underlying business has to be chosen carefully. What’s your business model? What are the basic business economics? What is it that you’re promising your customers? How will you deliver that in an economically sustainable fashion? So, if anything, this is the best time to invest in education. This is what I would say.

Luke:    

Thank you, Rishi. Thank you, Abhinav. You have been listening to Money Multiple. If you liked what you've heard, subscribe to our show on Apple Podcast, Spotify, or wherever you listen.