December 15, 2011

Education Technology – The Solution to Education Budget Issues?

If you look back a couple of years ago, the majority of all of the M&A and financing deal activity in the Education space was focused on For Profit Post-Secondary Schools. The times have certainly changed. Given the regulatory challenges that the For-Profit Education Sector has endured over the past few years, coupled with the negative press surrounding both job placement success and curriculum completion results, the deal activity and valuations in the space have suffered. In light of those challenges and what we believe will be a consolidation in the For-Profit space that may be accompanied by substantial restructuring efforts, where is the Education Investor of 2012 and beyond supposed to focus? Clearsight Advisors believes the answer is absolutely – Education Technology (otherwise known as “EdTech”).

Many investors have shied away from this space as it has had its historic challenges. Given the strength of the teacher’s unions and budget challenges in many school districts, many promising companies have had difficulty scaling their businesses. Those facts have led investors to limit their focus to only technology vendors catering to the university marketplace. Our contention is that the historic challenges, while not completely ameliorated, are beginning to dissipate. The budget issues are very real. A consensus is beginning to form that the historic challenges to EdTech vendor success are starting to break down because the only path to success in education, particularly with the current budget challenges, is to leverage technology to gain greater efficiencies. Technology, both K-12 as well as post-secondary, not only creates greater efficiencies, but when utilized in concert with talented forward thinking teachers provides today’s students with a much better quality education. We know that the historic impediments to EdTech vendor success will still take some time to address, but we remain confident that we are entering a new era in which the market opportunity is increasing at a tremendous rate. Thus, we see a significant opportunity for investors to capitalize on this trend and put capital to work in some fantastic growth businesses.

We apparently are not alone in our current thinking. The deal activity has been rather robust in the EdTech space. The most recent deal was this week’s acquisition of Intelliworks by Hobsons, Inc.. Other high profile deals in the space have included Blackboards acquisition by Providence Equity Partners and Renaissance Learning’s public M&A battle that resulted in Thoma Bravo backed Plato Learning acquiring Renaissance. These are but a few of the recent transactions in the space. We remain optimistic that both M&A and growth financings in the EdTech market will continue into 2012 and beyond because of the pending market growth and opportunity that is ahead. Stay tuned and feel free to reach out to the team at Clearsight for further insights and information.