
China regulatory crackdown threatens PE education deals

China has imposed severe restrictions on private tutoring that appear to undermine the commercial viability of companies in the space, potentially making private equity investment unviable.
The rules impact all independent providers of tutoring services from pre-school through K-12 levels. Relevant companies listed in Hong Kong and the US saw their stock prices collapse in response to the announcement last Friday.
Crucially, for-profit tutoring in core school subjects has been barred. Companies providing courses based on the school curriculum must register as non-profit organizations. Pricing will be standardized and set according to government guidance.
As an alternative, the regulator suggested that schools offer high-quality free online learning services, covering all grades and subjects. This would “promote educational equity,” it said.
No new licenses will be granted to groups that offer training based on the school curriculum. Existing operators must file for approval, with provincial authorities instructed to conduct comprehensive investigations before issuing any approvals.
The question-and-answer search engines that were behind the early success of market leaders Yuanfudao and Zuoyebang are prohibited. The regulator said they “affect students' independent thinking, and violate the laws of education and teaching.” One-to-one English tuition - provided by the likes of VIPKid - is also in question given restrictions on the hiring of foreign personnel based overseas to conduct training activities.
Pre-school players like Huohua Siwei - which has filed for a US IPO - and Wandou Siwei are in danger as well. Online training for pre-school children, defined as those below six years old, has been outlawed. No exceptions will be made for English language training or the arts, which threatens the business models of language specialist Palfish and are platforms Meishubao and Hualala.
Moreover, tutoring companies offering services based on the school curriculum are barred from pursuing public listings or other capital-raising activities. Companies that are already listed cannot invest in these businesses.
The regulations include various other significant measures. After-school tutoring during weekends, public holidays, and school vacations is banned; salaries will be controlled to stop tutoring companies from poaching teachers from schools; and online platforms must limit lessons to 30 minutes - TAL Education Group typically offers two-hour sessions - with intervals of at least 10 minutes.
The marketing blitz that has come to characterize the industry - and absorb much of the capital private equity investors have plowed into it - will also come to an end. Limitations have been placed on advertising in mainstream media, new media, public places, and billboards. Online communities for specific residential areas must not carry advertising for external training providers.
US-listed TAL said in a statement that it expects the new rules “will have a material adverse impact on its after-school tutoring services related to academic subjects in China's compulsory education." Other companies issued similar warnings.
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