The skills gap in the UK is fuelling institutional investment into corporate and vocational training businesses.
This is being driven by employers seeking evolving skillsets of employees in a increased digitised landscape, underpinned by cross-party commitment to provide the highest quality life-long training opportunities.
At the end of Q3 2019, 65 transactions in the sector were recorded for UK companies (including EdTech/eLearning deals). Of these deals, 43 had financial investor involvement, representing a 72% increase in the number of comparable deals in the same period in the previous year.
Spotlight on what’s driving investor appetite into skills and training
The expert panel at Grant Thornton's most recent Skills in the New World event was unanimous that one of the key reasons investors are attracted to the UK skills and training sector, particularly through times of political and economic uncertainty, is that it promises to be more resilient than others.
The scarcity of available labour and skills, partly exacerbated by any potential Brexit impact and increasing inequality, has resulted in workforce planning and people development becoming a higher priority.1 With 50% of large businesses having difficulty filling jobs,² companies are tackling these talent shortages by upskilling their own workforce. By investing in learning platforms and development tools to build their talent pipeline, corporate Britain are also increasing accessibility and breadth of training available to employees, encouraging lifelong learning².
The longer-term skills shortage, growing social mobility gap and ageing workforce means quality skills and training provision remains a priority across not just employers but also all UK government political party policy. This underpins strong funding visibility and reinforces healthy market dynamics for investors.
Investors also appreciate the inherent social impact of delivering skills and training services supported by skills policy, boosting employability and fuelling competitiveness and growth. Apprenticeships allow firms to tackle socio-economic imbalance in the workplaces by promoting social mobility,3 supported by a relatively stable and diverse funding environment in the UK.
Number of employers experiencing difficulty filling job vacancies
Source: ManpowerGroup, 2018
Quality not quantity?
Now into its third-year, the Apprenticeship Levy has pushed the skills shortage and the need for lifelong learning to the top of the corporate agenda heavily driven by the loss of levy to the Treasury after a two year period. Apprenticeship training and wider corporate training assets have become highly sought-after, particularly in areas of technical skills, eLearning and professional services training.
The latest step by the government also includes the introduction of new T Levels from 2020 (the technical equivalent to A Levels) and more high-quality apprenticeship opportunities. The government is still focused on its ambitious target of delivering three million quality apprenticeships by 2020 and improving the UK’s poor productivity record, which has resulted in an influx of training providers entering the market. The number of apprenticeship providers now in scope for Ofsted inspection has more than doubled since the levy reforms were introduced,4and there are more than 2,300 companies on the Education and Skills Funding Agency (ESFA) register of training providers. The quality of this increased provision can only be assessed with the passage of time.
The training provider market is expanding quickly, with increased access to Levy pots and advances in technology such as AI, micro learning and gamification. As a result, quality of content and national delivery methods rooted through a sector specialism are now at the center of investor strategy versus more generalist training provision.
The panel discussion emphasised the appeal of specialist training providers, particularly those that are underpinned by an aligned blue-chip employer base, learning technology and mounting learner bases, all of which ultimately results in a strong market position, higher barriers to entry and strong revenue and earnings visibility.
An increasing number of acquisitions across the institutional investor landscape
The market has seen both pure play equity investors and private equity backed trade players make a renewed push in the sector. The number of skills and training deals with a financial investor has increased by 17% compound annual growth rate (CAGR) in the three years from 2016 to Q3 of 2019.
UK skills and training M&A activity 2016 - Q3 2019 (corporate versus private equity/financial investor deals)
Source: Grant Thornton UK LLP
UK skills and training M&A activity Q1 - Q3 2019 (split by sector)
Source: Grant Thornton UK LLP
Notable private equity transactions include Apse Capital acquiring Kallidus (learning management system and online training) and Palatine’s Impact Fund acquiring Estio Training (IT apprenticeship training), representing its third acquisition in the sector. Palatine previously acquired Trade Skills 4U (electrical training) in 2017 and Business Driver Fleet Risk Management (corporate driving training) in 2018.
Activity in the private equity backed trade market provides an attractive hybrid for entrepreneurs and owner managers with Hg Capital-backed software business Access UK acquiring both Unicorn Training and Safety Media just four months apart (both compliance-led eLearning businesses). CVC-backed QA acquired InfoSec Skills (security training) in 2018 and Cloud Academy (digital training) more recently, and the large insurance group Davies (backed by HGGC and AimCo) acquired FWD Training & Consulting (insurance apprenticeship training).
The appetite for UK companies to expand globally has also been a driver for deal activity in the sector, for example Learning Technologies Group PLC entering the US market through its acquisition of PeopleFluent and its follow-on acquisition of Breezy HR.
Talent shortage and key trend driving the skills requirement of the future
Source: Pearson, 2017
Private equity houses are also supporting bolt-on acquisitions in the sector, for example Carlyle-backed Learning Pool acquiring HT2 Labs (SaaS eLearning provider) in Q2 of this year, following its acquisition of Mind Click (corporate eLearning) back in 2016, and Oakley Capital’s acquisitions of maritime eLearning providers Seagull and Videotel, bringing them together within an eight-week period.
Skills and training deal outlook – where does investor activity go from here?
In this dynamic, disruptive and evolving sector, both investors and corporates throughout the skills value chain are seeking strategic acquisitions to diversify their revenues, lock in established funding streams while socially driving real change in the employment markets and reduce skills gaps across the UK.
As awareness of the Levy grows, there are a growing number of employers that are really starting to reap the benefits of apprenticeships and put training at the heart of their corporate strategy. Apprenticeships coupled with blended ways of learning online is proving to be a way to plug skills gaps, attract and retain talent, and bring fresh thinking into UK business.
More than half of companies polled by the Institute of Student Employers said they recruited apprentices last year, and apprentice and school-leaver recruitment was 50% higher than in 2017 - a much faster rate than the 7% growth in graduate hiring5. This puts training providers under a spotlight to deliver impactful skills training and employability outcomes to meet the surge in employer demand.
Therefore, we expect the institutional investor appetite to continue with private equity backed trade businesses continuing to deliver their M&A strategies in pursuit of creating a more integrated training and development solution.
2020 is also anticipated to be an active period of exits for some financial investors with assets in the sector. MML Capital Partners-backed Learning Curve Group (vocational training), which acquired its competitor Profound Group in 2018, is expected to seek an exit. Similarly, Silverfleet Capital is expected to seek an exit from Lifetime Training Group (vocational apprenticeship training), after realising growth in just a short two-year hold period. Both assets are expected to have private equity and trade interest due to the continuing support of the Levy, providing visible and locked-in revenues.
We continue to help companies and investors in the skills and training sector across the full M&A spectrum to better understand the issues and make the most of the opportunities this growing market presents.