Deal focus: Investors exit as Tsingda refocuses on domestic IPO

Having worked towards a US IPO, Chinese online-to-offline (O2O) education service provider Tsingda eEdu Corporation registered to list on NASDAQ in 2011 but then stumbled amid market volatility. In the absence of capital from public investors, the company raised several rounds of offshore funding instead. OCBC's mezzanine capital unit was one of its backers.

"Initially we were of the opinion that an offshore IPO would be the best exit for us. However, the founder thought that the company might get a better valuation through an onshore IPO. As such, they had to dismantle the VIE [variable interest entity] structure and replace it with onshore funding. That provided an exit opportunity to us," says Daniel Kwan, head of MCU.

VIEs allow offshore investors to take equity stakes in companies that operate in sectors - including the internet and education - where foreign participation is restricted. Assets to which the offshore investors can have no direct exposure are held in a parallel entity owned by Chinese nationals. Contractual agreements secure the interests of the parent company in the parallel entity. But companies cannot list domestically with these structures.

Tsingda's change of plan facilitated exits for Capvent and RRJ Capital as well as MCU. RRJ and MCU, which committed $50 million and $20 million in early to mid-2014, have generated returns of nearly 3x on their investments. Capvent got involved even earlier, investing $5 million in 2012. The buyers of their shares were all onshore investors - including trust companies - that started expressing an interest in December 2014 when Tsingda withdrew its US IPO application.

Driven by a combination of urbanization, rising disposable incomes and the emergence of a middle class, China's education sector has become a popular target for private equity and venture capital investors. Last year, the government announced an end to the three-decade-old one child policy, which is expected to have a long-term positive impact on the industry.

MCU identified Tsingda two years ago following top-down research of the industry. Founded in 2003, the company provides supplementary educational courses and curricula for students from kindergarten through high school age. These are delivered across four online platforms - Babyangels.cn, Familybaby.cn, Xuexiba.com and Yi8edu.com. The online presence has since been supplemented by more than 3,000 offline teaching centers, most of which operate under a franchise model, in response to demand from parents for children to experience a classroom environment.

"They have classrooms but what is driving the company's growth and reach is its ability to package self-developed academic syllabuses on the online platform. They are able to roll out these products and market them throughout the country," says Kwan.

At present, the online business accounts for about two thirds of Tsingda's RMB1 billion ($152 million) in annual revenue. Students purchase pre-paid cards from offline centers and use them to access online courses.

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• Topics
• Greater China
• Trade sale
• Consumer
• Technology
• Exit
• Trade sale
• Education
• Technology
• China
• RRJ Capital
• OCBC