If it seems baffling that companies with no revenue can raise money from private investors (ahem, as some edtech startups did in the early 2010’s), then EdTechX Holdings might just sound outright crazy at first. Last October, the London-based education group went public on Nasdaq with no revenue, assets or product.
Wild as it may sound, such a public listing is not unheard of. EdTechX Holdings is a “special purpose acquisition company,” or SPAC for short. It raises money from the public with the explicit purpose of acquiring a private company. That company then becomes publicly-held, usually through a process known as a reverse merger.
SPACs date back decades, sometimes called “blind pools,” “blank check companies” and “shell companies.” They’ve earned these nicknames because SPACs initially have no assets, and most shareholders have no idea—or say—in what they will buy.
Or, in the words of Benjamin Vedrenne-Cloquet, CEO of EdTechX Holdings: “A SPAC is a vehicle that concentrates cash on a thematic focus, and [our] mission is to apply this cash to make acquisitions.” In the case of EdTechX, the mandate sounds as broad as it is bold: first buy one company in the education and training sector, he says, and then use it to “create a billion-dollar company through further acquisitions.”
EdTechX claims to be the first SPAC focused on the education technology industry. “Our first asset will be a platform play that is large and robust, and we’ll use this first acquisition as a catalyst for more deals and create a platform for next-gen educational and training businesses,” says Vedrenne-Cloquet.
The plan resembles a rollup strategy, similar to what private equity firms have pursued in the edtech industry. Frontline Education, Illuminate Education and PowerSchool are among a growing number of private equity-backed groups that have acquired other assets to consolidate educational services under one umbrella.
The key difference is that the company acquired by a SPAC becomes publicly held—and therefore subject to all the scrutiny and regulations of a public company. That means quarterly filings, earnings calls and expanded legal liabilities involving SEC rules.
Not many companies—including cashflow-positive ones—are eager to be governed by these new rules, especially at a time when private capital and mega funds can provide capital with less public exposure. A handful of revenue-generating companies in the edtech industry, including BrainPOP and Curriculum Associates, have chosen to stay private.
“SPACs are a bull market phenomenon,” observes Trace Urdan, a managing director at Tyton Partners, an investment and advisory firm. The emergence of companies like EdTechX, he notes, is “a function of both the enthusiasm for edtech, and where we are in the current market cycle. There’s a lot of money in institutional hands that needs to get deployed, and SPACs offer a viable avenue for that.”
Speaking with EdSurge, Vedrenne-Cloquet says EdTechX’s interests span everything from international K-12 education providers, to vocational training and professional certifications. To describe the market opportunity, he references UNESCO estimates that the world will need to serve close to a billion new learners, and add close to 45 million new teachers, by 2030. “There’s no way that the traditional education system can meet that demand,” he quips.
EdTechX Holdings raised $65 million in its initial public offering in October 2018, and has another $20 million in commitments from Azimut Holdings, one of its anchor investors. The group aims to buy an education company valued in the range of $100 million to $1 billion, and says it can raise additional capital once the EdTechX team has identified an acquisition target.
But the clock is ticking to find this asset—specifically, by April 2020. That’s because SPACs are legally obligated to buy a company within 18 months of their IPO, or else they have to return the money. That deadline can be extended a few months at most.
Investing in a SPAC requires a good measure of faith in its management team. EdTechX Holdings is run by Vedrenne-Cloquet and Charles McIntyre, who both lead IBIS Capital, a London-based investment banking and financial advisory firm in the media, technology and education sectors. (IBIS is the other anchor investor in EdTechX Holdings.) The duo have advised on deals including Pearson’s sale of Wall Street English, and invested in education companies including Immerse, a VR-training platform, and LearnLight, a language-training tool. Altogether, IBIS currently manages $500 million in assets across all its verticals.
This is not the pair’s first attempt to acquire and consolidate edtech assets. In 2013, they aimed to invest $70 million to create the Edxus Group, which was supposed to acquire and roll up European edtech companies. But soon afterward, “we concluded we were too early, and there were not too many businesses of scale, so we scrapped that idea,” recalls Vedrenne-Cloquet. Edxus was folded into another entity, Edtech Global, an IBIS subsidiary that convenes education technology conferences in Asia and Europe.
For private companies, SPACs offer a shortcut to getting into the public market, without the scrutiny, fees and paperwork that accompany a traditional IPO process. In other words, it can be faster to get acquired by a SPAC and become public, than filing for a public listing.
But the exposure that comes with filing for an IPO has its upsides, in the form of coverage from investment bankers and analysts that can be beneficial for companies. And SPACs can also raise new sets of management challenges, especially if the SPAC management team has different plans for the acquired company than what its leaders want. As in the private equity world, it’s not uncommon for buyers of a company to clean shop and swap the executive ranks.
Industry analysts say it’s rare for financially-strong, hotly-pursued private companies to go public via a SPAC. In their most optimistic view, SPACs can help accelerate companies that are not quite ready for the public spotlight yet—but show the potential to do so. Several well-known brands, including American Apparel, Hostess Brands (the makers of Twinkies) and Jamba Juice, have listed on the public markets this way. But on the whole, financial returns from SPACs have been so-so. According to SPAC Analytics, the 173 SPACs that have acquired a company have generated, on average, a negative return for investors.
Still, that’s not stemming investors’ enthusiasm for SPACs. In 2018, 46 of them went public, raising a total of $9.7 billion. Both figures, note IPO research firm Renaissance Capital, are the highest since 2007.
