Global investors are facing a widely varied post-Covid recovery with the IMF forecasting per capita income losses in emerging markets (ex-China) of -6.1% between 2000-2024, and potentially greater “scarring” over the medium term. There are a range of fiscal, humanitarian and social issues to consider and debate. I’ll pick one: the impact of an estimated 1.6 billion students who have had their education disrupted by Covid-19 and the 24 million children who (so far) may have dropped out permanently.
Figure 1: IMF’s Forecast on Post-Covid Income
With education, it is a question of magnitude. Even before Covid-19 there was a serious skills crisis that extended from the poorest countries to education powerhouses such as China, where, as I noted recently, rural education representing the majority of China’s workforce is lagging and ill-equipped for the future. Clearly other emerging markets without China’s vast resources or technological prowess will need to grapple with even deeper challenges to their future economic sustainability and their ability to attract higher value-added foreign investment based on skills levels.
Can they rely on government spending?
Covid-19 has taken a wrecking ball to many EM budgets. What is more, many countries already spend close to 6% of GDP on education (India is a glaring exception at 3.1%) and this expenditure has still not provided the access and quality of education necessary to build a modern, globally competitive workforce. Fortunately the private sector, fueled by years of venture and edtech funding, has been mashing together a range of digital education, workforce hiring solutions, entrepreneurial tools, a decentralized financial architecture, and the beginnings of on demand, globally tradable services and skills platforms.
If the public markets are any indication of how investors are betting on the future, then companies which can solve these most vexing education and workforce problems across the developing world will stand tall.
A roundup of our valuation data and transaction activity puts this into focus.
TRACKING MARKET VALUE
Our tracking portfolio measures enterprise value and EBITDA for the most globally-oriented education and workforce companies.
Since last October, total enterprise value rose 4% for education and a more substantial 20% for workforce companies. Our workforce constituents now have a publicly-traded market capitalization exceeding $1 trillion (v. education at $156 billion) which is at least a partial reflection of the substantially untapped education and labor markets across Asia, Latin America and Africa.
Individual valuations vary widely. Between 3Q 2020 and 1Q 2021 the median EV/EBITDA declined for education (-7% to 48x) but gained for the workforce sub-sector (+12% to 28x). Net debt was largely unchanged and insignificant with many companies operating on significant cash surpluses.
Figures 2 and 3 provide average and median figures.
Figure 2. Global Education Value Remains Flat
Figure 3. Global Workforce Continues to Expand in Market Value
Figures 4 and 5 provide a comparison of size and valuation (EV/EBITDA versus market cap) by individual companies, which also illustrates the wide variation of company valuations and investor expectations.
Figure 4: Global Workforce and Related Fintech
Figure 5: Global Education
INVESTMENT ACTIVITY
At ground level, we are early in the cycle for cross-border acquisitions and investments but there are many accelerants on the horizon.
Specifically:
- Highly-capitalized Edtech and CareerTech ventures with excess cash on the balance sheets that are carrying enormous pressure to grow into their valuations. One example, acquisitive BYJU, a leading online education provider in India whose latest Series F puts its valuation $15b, is talking more acquisitions, including outside of India.
- Increased access to cheap capital for public companies, thanks to the Fed’s commitment to zero rates. This also impacts demand for workforce ventures that include digital payments platforms and DeFi (decentralized finance) concepts for entrepreneurs worldwide.
- Pressure on education SPACs to deliver sizable acquisitions, mainly overseas (in the case of US SPACs), to justify their aggressive profit forecasts for 2022 and 2023. I have a lot to say about this – go here.
- Rapid digital adoption rates across global markets and services as a result of the pandemic, underpinning growth in addressable markets; and
- A global population still in need of innovative and impactful solutions, such as we outlined previously in the case of China, with many countries racing against time to improve education access and quality en masse.
Based on my own observations, the scope for global expansion among education and workforce sectors is immense. Our database has tracked over 20 notable cross-border acquisitions tracked between December 2019 and October 2020, with an additional 5 through May 2021. Key investors continue to be based from the US, Australia, China, and parts of Europe. Acquisition targets are predominantly in Asia (Figure 5).
Yet in terms of addressable market value this activity is still a drop in the ocean.
Figure 5. Cross-Border Acquisition Leaders
DEAL FLOW
A few transactions to note:
- Coursera’s global imperative. The company’s recent IPO documents, and a subsequent interview with the CEO, suggest that growth must come from outside the US. That’s not entirely surprising; roughly 51% of Coursera’s revenues are already from non-US markets. Yet Coursera is elite-focused with a highly selective 150 university partners. Is the fee-paying consumer and enterprise business scalable across emerging markets? Why hasn’t Coursera made headway in China (Asia-Pacific contributed $40m in revenues out of $294m in 2020) against formidable domestic competition? And what does this say about prospects in equally competitive markets such as India? Coursera is ahead of the pack, has runway for growth around the world, but there are questions. Expect some sizable acquisitions as a way into the most competitive markets, because organic growth is not fast enough.
- Remote’s tie-up with Carta. The ability of start-ups and smaller companies to operate globally has been a tough climb. Fortunately there are effective HR tools today to build and manage dispersed teams, including the back office and regulatory functions that often trip up companies in emerging markets. Carta, which provides a marketplace of global services, and Remote, which facilitates dispersed global access to entrepreneurs and experts for hire, is one example of how platforms and talent are collaborating to help scale businesses around the world. Others to watch: Turing, Papaya Global, Lattice, Factorial, and Deel.
- Education SPACs with global ambitions (because it’s crowded at home). Notwithstanding the structural challenges around the SPAC, or even the very concept of going public for many education companies, the level of acquisition funding and type of deals needed to justify most SPACs’ multi-year earnings projections will require a global strategy. But many will be challenged to make it happen because they have never looked outside the US education market (for more unpopular opinions on this, go here.)
- Keypath Education. A US-based, international student pathway provider is considering an IPO in Australia. Interesting choice. Australia has a number of well-known public education companies, including IDP and G8 Education, and one of the most forward-looking university sectors for international education. Keypath already operates in Australia where international education averages around 5% of GDP and the pathway sector is well established. Local peers such as Navitas (delisted via buyout in 2019) and StudyGroup (majority owned by investment fund Ardian after a strong run with Providence), offer a lucrative model to emulate. But they required a lot of capital.
- Sommet Education enters South Africa. Sommet, a leader in hospitality and culinary education, recently acquired a majority stake in Invictus which adds 6 more campuses to its network and doubles its global presence. Africa remains underinvested for vocational education and ripe for collaboration across a range of workforce areas–it will have the largest labor market in the world soon–although most investors still remain hesitant.
- UiPath IPO. Founded in Romania, UiPath is at the forefront of the automation-as-service trend by focusing on global markets from its inception. With an ARR (annualize revenue run rate) of $580 million and growing top-line at 81%, this “global first” company is a core element of the future of work and merits attention as a trendsetter. Meanwhile UiPath, with the coming rise of robots, is well placed to keep grinding out market share. It might also be an acquisition target itself.
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