China’s EdTech attack hits investors from Tiger to Temasek

(Bloomberg) — Global investors, from Tiger Global Management to Temasek Holdings Pte, are reeling after China imposed its strictest restrictions yet on its $100 billion private and online education sector.

China on Saturday ordered companies tutoring the school curriculum to become nonprofits, potentially wiping out much of the billions private equity and venture capital funds have deployed in a once-red-hot sector.

The platforms have lost their ability to go public, depriving their supporters of the exits they need to cash out. Foreign capital has been banned from the sector, with uncertain implications for the likes of Singapore’s Temasek and GIC Pte, as well as Warburg Pincus and SoftBank’s Vision Fund, all of which have invested in many of the industry’s major players. Those who break that rule should take steps to rectify the situation, the country’s most powerful administrative authority said, without elaborating further.

Beijing on Saturday published a plethora of regulations that together threaten to turn the sector upside down. The nationwide crackdown stems from a deeper backlash against the industry, as excessive tutoring harasses youth and burdens parents with expensive fees. Once considered a safe way for aspiring children (and parents) to get ahead, it’s now also seen as a barrier to one of Xi Jinping’s top priorities: boosting a declining birth rate.

Investors run the risk of having to downgrade their portfolios drastically, or worse, getting battered in a sell-off. On Friday, some of the biggest names in the industry including New Oriental Education & Technology Group Inc., TAL Education Group, Gaotu Techedu Inc. and Koolearn Technology Holding Ltd. after details of the impending containment came to light.

Read more: China bans for-profit tutoring over major overhaul

Warburg Pincus, GIC and Temasek representatives declined to comment. Representatives from Sequoia Capital China said they could not comment immediately. DST and Tiger did not respond to email requests for comment.

It’s a stunning turnaround of fortune for an industry that once had one of the fastest growth rates in the country. The online education sector is expected to generate 491 billion yuan ($76 billion) in revenue by 2024. Those high expectations made the stock markets darlings of TAL and Gaotu, and spawned a generation of giant startups like Yuanfudao and Zuoyebang.

The current regulatory attack reflects a broader campaign that began in late 2020 against the growing number of Chinese internet companies, from Didi Global Inc. to Alibaba Group Holding Ltd. Investors betting on tech names outside of edtech have suffered hundreds of billions of dollars in losses for the year since its inception, hammered by a series of regulatory crackdowns that extended from fintech to ride-hailing, grocery shopping and food delivery.

Beijing’s desire to take control of the economy and one of its most valuable resources is at the root of those actions. Companies that operate as internet platforms are increasingly under scrutiny for the massive amounts of data they collect, raising government concerns about issues of privacy and security.

The potential losses in education alone can be staggering.

Alibaba, Tencent Holdings Ltd. and ByteDance Ltd. are among investors who have entered the education arena. According to iResearch, online education platforms attracted approximately 103 billion yuan in capital in 2020 alone. The five largest companies accounted for 80% of the funding raised.

Among privately backed startups, Yuanfudao is one of the largest with a valuation of $17 billion, according to iResearch. Rival Zuoyebang achieved a valuation of $3 billion in 2018. And Huohua Siwei was valued at $1.5 billion this year, according to a local media report. Collectively, the three have raised $7 billion from investors, according to Crunchbase.

The regulatory measures have messed up the IPO plans of many high-flying startups, pushing down valuations for those who went ahead with a listing. Zhangmen Education Inc. has fallen 46% in New York since its IPO.

It is ultimately unclear how the government crackdown will play out – many believe Beijing will not try to wipe out an industry that still plays a vital role in nurturing its future workforce. For now, many investors may choose to be cautious.

Kerry Goh, chief investment officer at multi-family office Kamet Capital Partners Pte., said he has scaled down his positions in edtech companies in recent months “because of selling and asking questions later when it comes to China.”

“But we are looking for opportunities to rebuild positions,” he added.

(Updates with Chinese regulations published on Saturday.)

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