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Tech-Education Unicorn Turns Brazil Family Into Billionaires

Tech-Education Unicorn Turns Brazil Family Into Billionaires

(Bloomberg) -- Ari de Sa Cavalcante Neto was spending so much time away from home selling his firm’s shares to U.S. investors that he felt he owed his seven-year-old daughter an explanation.

“I told her I had entered a very long competition and, if I won, I’d bring home a unicorn,” Cavalcante, chief executive officer of Brazil’s Arco Platform Ltd., told a group of entrepreneurs earlier this year.

He did the girl one better. Not only did he get her a unicorn plush toy, but his long hours away from home helped the education tech firm become a unicorn itself. The company is valued at $2.4 billion, turning her family into billionaires.

Cavalcante pulled off a $210 million initial public offering on the U.S. Nasdaq exchange in September 2018 for his little-known Brazilian company, which started as a single school in the nation’s impoverished northeast region. The timing of the deal was challenging, as the pricing was set for just a month before Brazil’s presidential elections, when uncertainty about the nation’s political future was roiling markets.

Yet the IPO was priced at $17.50, the top of the proposed range, and the firm started trading at $24.50. Since then, shares have rallied about 170%, the second-best performing debut on the Nasdaq in the past 12 months, beating better known names including Pinterest Inc. and Uber Technologies Inc.

“Arco is a disrupter in Brazil’s private-education industry, with high-quality content, an attractive pricing model and a differentiated market strategy that will allow it to continue to take share in a highly fragmented industry,” said Elisa Mazen, a managing director and portfolio manager at ClearBridge Investments, which has a stake in the firm.

General Atlantic

The rally made billionaires of Ari and his father, Oto de Sa Cavalcante, who together hold a 54% stake in the company, according to Bloomberg calculations using the company’s prospectus. Oto is the biggest shareholder, with 38% of the firm’s equity capital. General Atlantic LLC became a shareholder in 2014 and has a 20% stake. The private equity firm didn’t sell in the public offering. Ari and his father declined to comment.

Tech-Education Unicorn Turns Brazil Family Into Billionaires

Arco’s valuation is close to some of Brazil’s long-established for-profit education giants, including Yduqs Part, formerly known as Estacio, a company whose net revenue is more than seven times higher than Arco’s. While Yduqs targets higher education, Arco only sells its products to the kindergarten to high-school segment.

The IPO competition may be over, but Cavalcante faces a new round of trials. After charming investors, the 40-year-old executive now needs to show his skills in sewing together all the businesses Arco has bought in recent years. They include Sistema Positivo de Ensino, a company that has more students than Arco. The acquisition hasn’t yet been approved by antitrust regulators.

Arco will now begin to look for M&A targets that can add new content to its current portfolio, such as robotics and programming, analysts at Banco Itau BBA said in a June 28 report.

School’s Founder

Cavalcante got the idea for Arco during his time at the MIT Sloan School of Management, in Cambridge, Massachusetts, he told an audience in April. The business of education has been in his family for generations: His grandfather acquired a school in 1941 in Fortaleza, the second-biggest city in Brazil’s northeast region.

Ari attended that school and so did Arco’s chief financial officer, David Peixoto, who worked for three years at Credit Suisse Group AG. It’s the original school’s own proprietary content that serves as the foundation for the one Arco sells.

The kindergarten to high-school market in Brazil totals around 180,000 schools and 44 million students -- with 40,000 private schools accounting for 8 million students. Among private schools, only about half use a learning system such as the one Arco provides instead of traditional textbooks.

Arco is not the only company that see opportunity in those numbers. Kroton Educacional SA, a $4.5 billion education behemoth, bought Somos Educacao SA last year, a firm focused on basic education. Kroton boasts about 1.26 million students in its core K-12 platform, while Arco has about 500,000. In May, Arco agreed to pay 1.65 billion reais ($400 million) for Sistema Positivo de Ensino, a rival with 698,000 students.

“The main risks for Arco are how competition will evolve, especially after Kroton acquired Somos, and the integration with Positivo, which is a large asset, so this kind of merger isn’t trivial,” said Susana Salaru, an analyst at Itau BBA, who rates the firm “neutral.”

To contact the reporters on this story: Felipe Marques in Sao Paulo at fmarques10@bloomberg.net;Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net;Vinícius Andrade in São Paulo at vandrade3@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Steve Dickson, Dan Reichl

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