The 2020 Back-to-School Conundrum for Education Investors

Sep 2020

After six months, we feel confident in saying that 2020 will go down as one of the most unique years in the history of education investing. COVID-19 has impacted every element of the education market in varying ways – in some cases dramatically accelerating trends toward online learning and the use of digital solutions; in other cases severely curtailing investment in new technologies as school systems and postsecondary institutions froze budgets and suspended all procurement processes for a period of time. Now as we quickly approach the back-to-school season, eyes across the country (and globally) are paying attention to the daily policy drama playing out at state and local levels.

All of this change creates the classic mix of opportunity and risk for education investors. An acceleration of technology adoption would suggest potentially massive opportunities to invest in companies that support online learning and/or enable schools to manage their critical processes remotely via the cloud. Similarly, the requirements of online learning have only accelerated the shift from traditional textbooks to digital solutions. At the same time, early childhood centers and many proprietary K-12 schools have been forced to adjust to lockdowns and quarantines. While many are shying away from those market segments given the uncertainty around them today, others see this as a unique time to find strong companies that will survive the lockdown periods and be well positioned to benefit from a return to normalcy. Similarly, some foresee aggressive growth for proprietary postsecondary institutions given a potentially extended recessionary environment and acutely high unemployment levels.

As we talk to investors active in the education market, we have heard every possible point of view on when, how and where to invest in the market. While we will not try to relate all of those permutations, we thought it would be useful to summarize the more prominent themes that investors have highlighted:

We expect to see a flurry of activity in the fourth quarter of 2020 and into 2021 as businesses that have performed and continue to perform well in this year’s most unusual back-to-school cycle look to capitalize on unprecedented investor demand. Those that have proven themselves to be “must-haves” for their customers will be rewarded with strong interest from investors and acquirors. Savvy investors will look for the performance metrics that tend to manifest from being a must-have solution, including higher retention rates, multi-year contracts, higher conversion rates, etc. Similarly, investors at the forefront of the education market will continue to aggressively seek out scalable solutions that enable broad re-skilling and workforce development solutions. A lack of mature businesses in this segment, coupled with the intense demand for them resulting from COVID-driven unemployment, will continue to drive pent-up demand that results in aggressive investor behavior.