Daily Management Review

Private Equity Backed Investors Scrambling To Exit Chinese Education Market


Private Equity Backed Investors Scrambling To Exit Chinese Education Market
A number of ventures and private equity investors in China are trying to find an exit from the market after they had made investments worth billions of dollars into the education sector of the country because of the move by Chinese authorities to end profit making by private tutoring firms from teaching core school subjects and raising capital form the market.
There were expectations in the market for some time now that Chinese policy makers were contemplating strict measures for easing pressure on children as well as reducing the cost burden on parents of financing their children’s education which has arguably partly contributed to lower birth. However, the recent decision by China in this regards surprised players in the private equity industry because of the severity of the steps as they fear that these measures will force companies in the sector to shut down and even block exit routes.
"Every company is going to take a hit with large layoffs coming," a Shanghai-based private equity (PE) investor whose firm invested in a number of online education apps targeting school-aged children was quoted in a report in China as sating. "There is zero VC (venture capital) and PE investors can do at the moment.
"We are all waiting for death," the investor said.
A lack of clarity on how China would implement the rules was bemoaned by a number of PE investors while others reportedly said that more strict steps could follow and that the blow for firms could be softened by bulking up on non-academic tutoring.
The new rules imposed by China all companies and firms that are engaged in providing tutoring on the school curriculum will have to be re-registered as non-profit organizations and no new licenses in this sector will be given to any new company. The new rules resulted in a huge drop in the shares of Chinese private education firms.
According to an official document quoted in the media, the new rules also prevent companies in this sector from raising money through public listings or other capital-related activities and also ban listed Chinese companies from investing in such private tutorial institutions.
The new rules also prevent any foreign investment in companies in this sector.
According to data from Refinitiv, the Covid-19 pandemic forced lockdowns in China last year and resulted in a boom in demand for online education with the private equity backed investments in the education sector of China hit a record high of $8.1 billion. That is more than half the total deal value of $15.5 billion since 2016.
According to data provider Zero2IPO Group, the biggest chunk of the private capital raised in 2020 was accounted for by Yuanfudao and Zuoyebang, the two leading unlisted online education platforms of China.
Tencent Holdings banked Yuanfudao raised as much as $3.5 billion in 2020 in three fundraising rounds and according to Zero2IPO, the value of the company was increased to more than doubling within 12 months.
On the other hand, $2.3 billion in two funding rounds was raised by Zuoyebang last year and has attracted investments from Alibaba Group, SoftBank's Vision Fund, Sequoia China, and Fountainvest Capital Partners.