£16 billion market attracts private providers to education and training sector

The education sector is one of the major beneficiaries of government expenditure globally and the third largest area of government spending in the UK. Structural reforms in developed markets, rising participation rates in developing countries, internationalisation of education and the growing role of technology are creating significant opportunities for private providers. This has resulted in increasing mergers and acquisitions (M&A) activity, according to new research from Catalyst Corporate Finance.

Rising competition in education support services

The UK education support services market is estimated to be worth £16 billion per annum. The Coalition Government’s abolition of procurement ‘quangos’, Local Authority (LA) budget cuts and the erosion of control over school decision making is influencing how businesses are selling to schools and attracting new strategic players looking to exploit this much larger and more fragmented market.

Smiths News Plc is one such company. Having acquired The Consortium in 2012 for £38 million, it is now looking to increase market share by targeting additional schools and adjacent markets such as nurseries. Budget pressures have also created opportunities for established Government Business Process Outsourcing (BPO) providers. Some LAs are looking to outsource functions from their educational departments and share services across county boundaries, as has been done successfully in the South West through the Devon Learning & Development partnership launched by Devon County Council and Babcock Plc.

Increasing demand for tutoring services

As competition for schools and university places rises, there has been a corresponding increase in school and parent spending on services to improve attainment. Tutoring services alone are worth over £1 billion per annum in the UK and we are seeing some brands gaining a foothold in this sector such as Explore Learning, backed by Graphite Capital. The company has grown its turnover from £8.6 million in 2009 to £19.7 million in 2012 and is seeking to expand in the UK and potentially oversees.

Rapid rise of digital learning

The e-learning sector is the fastest growing market in education. Worth an estimated $91 billion globally, it is forecast to grow at an annual rate of 23% up to 2017. Both strategic corporates and private equity investors have recognised the potential in this sector, evidenced by Capita’s recent acquisition of Creating Careers which followed its acquisition of Knowledge Pool and Investcorp’s backing of the secondary management buy-out of GL Education.

FE colleges are now active acquirers

Caps to FE funding and the sector’s reclassification to the private sector mean more institutions are reassessing their operating models. FE colleges including Leeds City College, Chesterfield College and Liverpool Community College are using acquisitions to enhance their proposition, improve links with employers and gain expertise.

In the independent sixth form college market, private equity is developing a scalable offering by using established private colleges to set up new schools, expand into primary and secondary provision and target the international market. An example of this is Sovereign Capital’s acquisition of three London-based independent sixth form colleges, the Astrum Education Group.

Private equity is now a key investor

In 2013 there was a record 63 deals worth £1.9 billion. Whilst trade buyers continue to dominate activity, private equity is now responsible for around a fifth of transactions, taking advantage of the sector’s fragmented nature and lack of large targets to build platforms and enhance exit prospects. As highlighted above, private equity is attracted to leading brands in the independent schools and sixth form sector, as well as those companies which are taking advantage of the services required by international students such as pathway course providers like Cambridge Education Group (CEG). In December 2013, Bridgepoint acquired CEG from Palamon for £185 million. Bridgepoint will help CEG to develop its offering, in particular by expanding further into international markets like the US.

Prospects for M&A

We expect that M&A activity will continue at current levels for the next few years as the sector adapts to continued change. Both PE and trade buyers will remain active and the secondary market will become increasingly important as management teams and investors seek to exit.

Jeremy Harrison is director of Catalyst Corporate Finance, the advisory firm that specialises in company sales, acquisitions, private equity and debt funded management buy-outs

A full copy of the report can be obtained by contacting Jeremy Harrison, [email protected]