China Private Equity Firms “Wait For Death” After New Rules

China Private Equity Firms “Wait For Death” After New Rules

China’s move to ban private tutoring companies from profiting from teaching basic school subjects and raising capital is expected to trigger a rush among venture capitalists and private equity investors to find a exit after investing billions of dollars in the sector.
As tighter regulations were expected with China seeking to ease the pressure on children and the financial burden on parents that has contributed to lower birth rates, sources in the private equity industry say they are surprised by the severity rules that could kill many companies and block their exits. .

“Every business is going to be affected by major layoffs,” said a Shanghai-based private equity (PE) investor whose company has invested in a number of online education apps targeting school-aged children . “There is no VC (venture capital) and PE investors can do that at the moment.

“We are all waiting for death.

Several private equity investors lamented the lack of clarity on how China would implement the rules, though some said it may not be the end and strengthening non-academic private tuition could. help soften the shock to business.

Under the new rules, which resulted in a significant drop in the shares of Chinese private education companies, all institutions offering private lessons on the school curriculum will be registered as non-profit organizations and no new licenses will be issued. granted.

The rules prohibit these companies from raising funds through listings or other capital-related activities and also prohibit Chinese listed companies from investing in such private tutoring institutions, according to an official document. Foreign investments are prohibited in these companies.

Record private capital raised

Private capital-backed investment in China’s education sector hit an all-time high of $ 8.1 billion last year, as lockdowns induced by the pandemic boosted demand for online education , according to data from Refinitiv. That’s more than half of the total value of the $ 15.5 billion deal since 2016.

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

Yuanfudao, backed by Tencent Holdings, completed three fundraisers totaling $ 3.5 billion in 2020, with the company’s valuations more than doubling in 12 months, according to Zero2IPO and Reuters reports.

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

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

All sources declined to be identified due to the sensitivity of the matter.

‘Just jostle each other’

Some private equity investors believe their portfolio companies might consider transforming their curriculum-based tutoring activities into vocational and extracurricular classes to ease the shock of the new rules.

China’s $ 120 billion private tutoring sector may seek to separate its business segments and strengthen non-university tutoring, analysts said Monday.

Over 70% of education sector fundraising in the first half of 2021 went to business service, extracurricular education and vocational training companies, data from local research firm showed. EDU INSIGHT, in the midst of expectations of new rules.

Some PE investors in the tutoring groups said it was not clear how China would implement the new rules and if and how the investors would exit.

“There is always a time lag between the publication of Chinese policies and their implementation. And there is always room for interpretation, ”said one Zuoyebang investor.

“Right now, everyone is jostling. ”


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