K12 deal volume in Southeast Asia is down 60% year-over-year, a leading transactional lawyer said during an EducationInvestor Global webinar – but a “significant” uptick in transactions in the fourth quarter could offset this dip.

Thomas Choo, partner at Clyde & Co in Singapore, who specialises in education M&A, said that his practice has advised on “about 40%” of the number of deals it did last year.

However, “I expect Q4 to pick up quite significantly”, propelled by economic recoveries and school re-openings, he said during this publication’s most recent webinar, Dealing with distress – Investing and operating in a turbulent environment.

Choo was speaking alongside Prakash Pillai, partner and head of Clyde & Co’s restricting and insolvency practice in Singapore; Richard Draycott, group head of investment and partnerships at private school operator ISP; and Chris Smith, partner at Clearwater International’s debt advisory practice.

Choo said that, despite widespread volatility caused by Covid-19, several markets, including Thailand, Vietnam and Indonesia, which is opening up its education market further to foreign investment, had been “hot” and had drawn increased interest from investors.

The downturn in deal activity was most acute between March and May, said Choo, when most of “my M&A deals were put on hold indefinitely” as stakeholders scrambled to assess the medium-term financial impact of government-enforced school closures.

During this period, the focus of school operators and investors shifted to protecting balance sheets and preserving cash flow, while grappling with legal and regulatory issues related to tuition fee refunds and employment contracts, he said.

Then, between June and August, as economies across the world began to re-open, negotiations on pre-planned deals resumed, said Choo, albeit that, in many instances, pricing was revised and earn-out clauses added to mitigate buy-side risk.

Draycott, whose organisation ISP runs more than 45 schools in 12 countries, highlighted a “stark example” of distress in the UK’s private school market, where more than 30 institutions have so far been forced to close permanently.

“We’ve seen globally that there’s a number of private schools – some quite well-known – that have either gone into bankruptcy or just closed, which has never happened before at this scale,” he said.

ISP, said Draycott, has not permanently shuttered any schools, though some of its sites remain out of action due to government-imposed measures in certain jurisdictions.

ISP “continues to look at” acquisition opportunities, he said, but noted that distressed schools “are not always of interest because you need to understand why a school is distressed and the reasons it has gone into decline” – which may be unrelated to the pandemic.

Draycott did not have a definitive view on pricing within the markets in which ISP operates. He explained: “It’s like asking about house prices. There are different prices in different markets. A lot of the good schools”, despite the coronavirus crisis, “continue to attract good buyers at good prices”.

Pillai approached the topic of distress in the K12 sector through a Singaporean lens. The city-state’s government, he said, had managed to stave off widespread bankruptcies by implementing measures to protect businesses, including education providers.

However, many relief measures have “now lapsed without a whisper”, he said, meaning “we are back in the status quo where one can enforce contracts” – posing a risk to leveraged companies struggling to meet their debt obligations.

For this reason, “from an insolvency point of view, I think the worst is probably yet to come”, said Pillai, forecasting an uptick in restructuring and bankruptcies later in the year and early next as governments worldwide gradually withdraw stimulus packages.

Smith, who advises UK education operators and investors on credit facilities, said that liquidity is widely available from both banks and debt funds, though the latter, which often lend to private equity funds for buyouts, charge a higher premium of 6-8%.

He agreed with Pillai’s assessment of the situation in Singapore, suggesting the same will play out in the British education market.  

“What [British] lenders have done is kick the can down the road,” he said. “We haven’t seen many insolvencies or much restructuring yet – but I think this will change in the coming months. We have had massive government intervention, but that can’t last forever. Economically, we are staring down the barrel at some significant pain.”

Date published: 22 October 2020

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