China dropped out of college LBO
China’s crackdown on the private education sector at the start of the decade is still having an impact, with a proposed leveraged buyout for Dulwich College International downsized to carve out only its non-Chinese assets.
Private equity giant Blackstone Group is in exclusive talks with DCI’s founders for a potential LBO of the group’s operations in Singapore and South Korea in a deal that could fetch over US$400m and involve a loan of about US$240m.
The size is smaller than the previously expected US$400m as it excludes DCI’s China business, which was part of the initial plan that British lawyer Fraser White and his wife Karen Yung had when the founders kicked off the sale process last October.
However, economic headwinds, geopolitical tensions and regulatory uncertainties have dampened appetite among international investors for China risk. The country’s education sector has undergone significant regulatory changes over the past few years, including a sweeping ban on for-profit after-school tutoring.
“Every single PE fund that has invested in education assets in China has suffered given a few years back the Chinese government decided to ban for-profit schools,” said a Singapore-based loan banker. “The regulatory risk with China today is a real problem.”
The ban, which was introduced in July 2021 and aimed to alleviate pressure on students and raise the country's birth rate by lowering family costs, has put tens of thousands of private tutoring schools out of business.
Singapore-based Learning Lab, a provider of K-12 tutorial services, provided an object lesson on the risks of investing in China’s education sector. The regulatory crackdown forced the company’s owner, Advent International, to write down to zero the value of Best Learning, an English language training institute for juniors in China. The PE firm acquired Best Learning in March 2018 as a bolt-on for the Learning Lab asset.
Last May, Advent raised a S$265m (US$196m) unitranche financing, which refinanced a S$178m five-year term loan raised from banks in 2017 as well as a S$80m add-on that had funded the acquisition of Best Learning.
Anything but China
While The Learning Lab is now a purely Singapore-focused business, DCI was established as the first independent British school to operate in China. In the past couple of decades it has grown to multiple campuses in Beijing, Shanghai, Suzhou and Zhuhai in the country, as well as Singapore and South Korea.
Blackstone’s bet on the non-China operations is emblematic of the sentiment among international investors and financiers about the uncertainty surrounding potential government crackdowns, along with a bumpy recovery and weak economic outlook in China.
“China used to make up a bulk of Asia Pacific’s leveraged financing activity, but those days are gone,” said a Hong Kong-based loan banker. “Activities have moved outside of China as investors are looking further for growth and diversification.”
Financings backing LBOs for international financial sponsors involving Chinese assets have plunged 61% to US$1.65bn in 2023, compared to the heights of US$4.2bn in 2017, before the US-China trade war began in 2018, according to LPC data.
The loan of about US$240m for DCI’s LBO with a leverage multiple of around 5x is in the works, according to sources with knowledge of the matter. Blackstone declined to comment on the matter.
Banks are said to be working on proposals for the borrowing, unlike The Learning Lab’s unitranche, which was largely sold down to non-bank lenders HPS Investment Partners and KKR Credit.
The Learning Lab’s unitranche was structured for non-bank lenders with leverage of slightly over 6x and an interest margin in the mid to high 700s over SOFR, payable partly in cash and partly in PIK form.
The last education-related loan to tap the bank market in Asia was a US$380m five-year borrowing for PE firm BPEA EQT’s LBO of IMG Academy, the famed Florida tennis school founded by Nick Bollettieri and a non-Asian business. Four banks joined the 10 leads on the deal, which pays a margin of 400bp over SOFR and represents a leverage multiple of around 4.5x.
BPEA EQT acquired IMG in partnership with Nord Anglia Education, which has a long history of raising loans from banks as well as non-banks since the PE firm teamed up with Canada Pension Plan Investment Board to take the international schools operator private in a US$4.7bn buyout in 2017.
Last September, Nord Anglia closed euro and US dollar Term loan B financings to reprice first-lien loans – a €1.515bn (US$1.62bn) tranche and a US$906m tranche – due January 2028. Nord Anglia has over 80 schools globally, including 21 in China.