Private equity firms scramble to exit from China’s education sector

With China enacting a new law that bans private tutoring firms from making a profit from teaching core school subjects and raising capital, private equity investors are scrambling to exit the sector after pouring billions of dollars into it.

With stringent regulations, China aims to ease pressure on parents on the cost of educating children, which has negatively contributed to lower birth rates.

According to private equity industry sources, China’s sudden surprise move and the severity of the rules, is likely to kill many companies and block their exits.

“Every company is going to take a hit with large layoffs coming,” said a Shanghai-based private equity (PE) investor whose firm invested in a number of online education apps targeting school-aged children. “There is zero VC (venture capital) and PE investors can do at the moment. We are all waiting for death.”

A large number of private equity investors bemoaned on the lack of clarity on how authorities would implement the rules, with many saying these stringent rules are only the beginning and that bulking up on non-academic tutoring could help soften the blow for firms.

Under China’s new rules, institutions offering tutoring on the school curriculum will now have to be registered as non-profit organizations and new licenses will not be granted.

The new rules PE firms from raising money via listings or other capital-related activities, and bar listed Chinese companies from investing in such private tutorial institutions. Foreign investments in these companies are also disallowed.

Private equity-backed investments into China’s education sector hit a record high of $8.1 billion in 2020 with the coronavirus-induced COVID-19 lockdowns boosting demand for online education.

According to data provider Zero2IPO Group, two of China’s leading unlisted online education platforms, Yuanfudao and Zuoyebang, accounted for the biggest chunk of the private capital raised in 2020.

In 2020, Tencent Holdings-backed Yuanfudao completed three fundraising rounds totaling $3.5 billion, with the company’s valuations more than doubling within 12 months.

Yuanfudao’s investors include Hillhouse Capital Group, Singaporean sovereign wealth funds GIC and Temasek, DST Global, Boyu Capital, and Jack Ma’s Yunfeng Capital.

Zuoyebang, which raised over $2.3 billion in two funding rounds in 2020, counts Alibaba Group , SoftBank’s Vision Fund, Sequoia China, and Fountainvest Capital Partners among its investors.

According to analysts, China’s $120 billion private tutoring sector could seek to separate its business segments and bulk up non-academic tutoring. “There is always a time gap between the issuing of China’s policies and the implementation of them. And there is always room for interpretation,” said a Zuoyebang investor. “Right now everybody is just scrambling around.”

Categories: Creativity, Entrepreneurship, HR & Organization, Strategy

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