New Relationship Status: Private not Public
Bain is taking PowerSchool private, the latest in a reversal of IPOs. Let's unpack why.
What’s Happening in the Market
Bain Capital is in talks to purchase PowerSchool and take it private (Reuters). PowerSchool is an LMS platform for schools across 90 countries, but it’s had a rocky ownership history. It was acquired by Apple from 2001 to 2006, Pearson from 2006 to 2015, and then a consortium of investors (including Vista Partners) who took it public in 2021. The stock is below its IPO price, and about half of its pandemic high a few years ago. Bain is eying it at a $20 share price, about a 10% premium to its current price. The assumption being that PowerSchool’s value can be unlocked through more patient capital, cost-cutting efficiency, and integration with Bain’s other EdTech holdings (such as Branching Minds, TeachTown, etc.). Furthermore, it provides Bain’s other portfolio companies with a new growth vector: So upselling Branching Minds (which serves 1.5M students) to upsell into PowerSchool’s install base (about 90M students).
Chegg’s stock price continues to crater amidst disruption from AI. Their stock price is down over 30% in the last thirty days, after reporting earnings misses, huge revenue declines, and a CEO shakeup. AI is still finding product market fit in the education space generally, but the one place where it has a definitive impact is in academic assistance (homework solutions, test prep, essay prompts, etc.). The short-term future for Chegg doesn’t look so bright, as its already extremely cost-sensitive consumer base (college kids) have a pretty much free alternative (ChatGPT)
What We’re Talking About
School segregation is increasing across America, but especially so in our largest districts of color (Chalkbeat). A study from Sean Reardon at Stanford and Ann Owens at USC found that Black-white segregation has increased by 3.5 percentage points from 1990 to 2019, and in the 100 largest school districts, it’s increased by 8 percentage points. School choice (including charter schools) was found to be a large driver of this: It allows more affluent families to gentrify neighborhoods without enrolling students (such as in NYC, where white families make up about 35% of the population, but less than 15% of public school enrollment). Without charter school expansion, Reardon and Owens predict segregation to be about 14% lower.
One Big Idea
When you look at the public companies in the Edtech space, they were hit hard over the last couple of years. Soon we might see private equity firms buying out public Edtech companies for attractive prices and turning them into private enterprises again. - Felix Oswald, Founder, GoStudent
Bain’s proposed acquisition of PowerSchool highlights a trend recently of companies reversing some of the IPO momentum of recent years. This past February, General Atlantic and Stone Point Capital agreed to take HireRight private; HireRight only went public in 2021, but was trading about 25% below their IPO price before the news was announced, and is still trading about 16% below that price. Zhangman Education, an online tutoring company in China, had raised over $900M before going public in June 2021. Its stock price hit $17 in its first day, before plummeting below $1 less than a year later. The company’s CEO and founder repurchased all of the NYSE-listed shares and took the company private again in July 2023.
“Edtech activity in public & private markets,” by Dealroom & Brighteye Ventures (source), 2022
Instructure went private in 2019, and Pluralsight in 2020. So this isn’t a new phenomenon, but it is one that is predicted to increase, especially as high interest rates have knee-capped the short term growth potential that public markets prioritize. As interest rates decimate the capitalization of growth-stage startups (we’ve written in the past about how Udemy and Byju’s are spending so much just to service their debt), stock prices decline. And that makes it much more attractive for PE firms to acquire these companies and do what they do best: Cut costs and set longer term strategies (such as when Equity Partners took Blackboard private in 2011).
Byju is off the table for any acquisitoin. The company is too expensive, too messy, and too risky. Current investors would have to be bought out at horrible devaluations. Chegg could be a possible target for an acquisition, with a market cap of less than $500M, down from a high of nearly $2B in 2023. But with AI destabilizing the company, it’s hard to imagine any firm feeling confident enough to patiently invest in Chegg, given all the risks. Udemy could be an interesting acquisition. The company is still trading below its IPO price, but hasn’t been hit as hard as other public EdTech firms. Their market cap is about $1.5B, down from the December 2023 peak of $2.26B, but far higher than their $1.29B market cap in March 2023. Their debt obligations are still demolishing their balance sheet (an EBITDA of -$117M now vs. -$22M in March 2023). A PE firm could view this as a prime opportunity to inject capital to pay down debt, cut costs, and unlock synergies with their portfolio companies–thereby turning that EBITDA around.
More EdTech companies will stay private for longer due to the brutal public markets and the philosophical need to be more long term driven for this sector, but it’ll be interesting to see whether this trend of privatization continues, too.