Four years after investing in Rise Education, private equity firm Bain Capital is looking to partially exit the investment as it kicks off a $154 million US initial public offering of the Chinese private education provider on Monday.
Initial terms show Bain is seeking an implied valuation of about $770 million on a pre-greenshoe basis for the private tutorial firm, or nearly six times its $130 million investment made in July 2013.
That eye-catching return underscores the rising demand for private tutoring as China’s middle class grows. In the stock market, demand for education stocks is equally high as most of them are reaching record levels of late.
US-listed Chinese education firms such as TAL Education and New Oriental Education are among the biggest gainers with shares rising 117% and 191% respectively since the beginning of the year. Hong Kong-listed China Maple Leaf Education and Yuhua Education have soared 79% and 96% respectively.
Bain does not need to look far for another success story. RYB Education, a Chinese kindergarten operator that priced a larger-than-expected $133 million New York IPO last month, saw its shares jump 51% within a fortnight.
Different market
But whether Rise Education can find the same success is still anyone’s guess. One of the reasons is that Rise provides after-school English language tutorials to students, which differentiates it from most of the listed education companies that run private schools.
Naturally, demand for private schooling is higher than after-school tutorial services because the latter is often seen as a supplement to the official curriculum.
Another potential factor affecting Rise Education is that the after-school tutorial sector is much more fragmented than the private school sector. Rise, which claims to be the second biggest player in the private tutorial market, commands only a 10.6% market share last year.
Due to intense competition, most private tutorial operators are yet to build brand awareness that is solid enough to attract more students. That is contrary to the private school market, which has nurtured some well-known brands such as Nord Anglia Education and China Maple Leaf Education.
Value proposition
But the flip side of the coin is that private tutorial operators are more scalable and can expand within a shorter period of time. This is because they are more flexible in terms of their curriculum and can provide more customised teaching depending on students’ capabilities.
Operational flexibility means Rise Education could potentially take advantage of the rapidly-expanding private tutorial market.
UBS Securities suggests the value of the K-12 private tutorial market – referring to tutorials for students aged 3 to 18 – could more than double to Rmb1.1 trillion ($163 billion) by 2021 from Rmb497 billion last year.
In its marketing material, Rise Education highlights China’s relatively low penetration rate of private tutorial services compared with other developed countries in Asia. As of the end of last year, 8.4 out of 100 students in China enrolled in after-school tutorials, while Japanese and South Korean private tutorial firms serve 35.2 and 60.5 out of every 100 regular school students respectively.
Another selling point for Rise Education’s IPO is the fact that Bain will retain most of its interest after the IPO, which could be interpreted as a sign that the private equity firm is still confident about the prospects of the Beijing-headquartered company.
Deal terms
Bain will be selling 20% of Rise Education’s enlarged share capital through the IPO that features 11 million American Depositary Shares (ADS), each representing two ordinary shares. A total of 5 million new ADS will be issued while Bain will sell 6 million existing ADS.
Rise Education has set an initial price range for the IPO at $12 to $14 per ADS. The company will conduct management roadshows in Hong Kong, New York, Boston, San Francisco and Chicago until October 19, a day before trading begins on the New York or the Nasdaq stock exchange.
Joint lead underwriters of the IPO are Morgan Stanley and Credit Suisse. HSBC and UBS are joint underwriters.
