China Sees Slowdown in Education Sector Investment

Investment has been slow in the once booming Chinese education sector this year, and the education industry has failed to improve investor confidence. Though the Chinese government is spending significant amounts of money to improve the education system and a wave of technology companies are developing online tools to aid learning, the nation’s innovation may be experiencing a plateau.

According to Sonja Cheung of The Wall Street Journal, a general slowdown in deal flow across all sectors this year is a main reason for the lack of education-related investment. Investors also note that it is tricky to pick the right subsector within the education industry that will pay off.

In 2013, the second major investment into a Chinese education company is due to close soon. Fenbi.com, an online education platform, is expected to close next month with about a $7 million second round, according to Xiang Gao, partner at IDG Capital Partners, one of the investors in the deal.

For the first time ever, the Chinese Ministry of Education met its goal of spending 4% of gross domestic product on education, after the target was set 20 years ago. Although that money will be filtered into the public sector, in particular to boost education in remote or poor rural areas, the momentum is also expected to drive the private sector as learning becomes a top priority. However, investments in private education-related companies have recently been lackluster in contrast with more boom years from 2008 to 2011, when an annual average of $189.3 million worth of deals was completed, figures from Asia Private Equity Review show.

Consulting firm Parthenon Group sees pre- or primary education as an ideal for investment, but other industry experts say that investors are making a shift towards online education.

According to Parthenon, the gross enrollment rate of children is expected to increase in the period from 2010 to 2020 in pre- and primary education. The company points to offline schools, including private establishment Victoria Kindergarten, as “interesting.”

In 2013, Shanghai-based Alo7, which provides an English language courses online for 3- to 15-year olds, closed a series C round of funding of $10 million backed by Qualcomm Ventures, United Microelectronics Corporation and Vickers Venture Partners.

Investors still are hesitant to invest in online education. One venture investor whose firm has at least one education company in its portfolio said that it is hard to know who the target customer is: the parent, child or school. According to IDG Capital Partners, the company is expected to veer away from online products catering to primary school children.

“Education in China is different from the U.S.,” Gao noted, highlighting that school children across the mainland’s major cities have little free time after school, so logging on to do more learning is unlikely. possibility that homework would become a thing of the past, to help lighten academic pressure.