GJBM Private Equity Investment in India with Special Reference to Education Sector ISSN: 0973-8533 Vol. 4 No. 1, June 2010 91 PRIVATE EQUITY INVESTMENT IN INDIA WITH SPECIAL REFERENCE TO EDUCATION SECTOR Archana Pandey* ABSTRACT Indians spend approximately $44.8 billion on education while the global education market is approximately $2 trillion. Approximately 26% or $11.5 billion of the industry in India is private and offers investment opportunities. Market growth across the Indian private education sector is in excess of 10% per annum and this sector is looking like a major opportunity over the next few years. In an uncertain economic environment, private equity investors are finding the education sector attractive for long-term investments. From just three deals valued at $21.6 million in 2005, investment in the sector till October this year has increased to $238.7 million. Currently, PE investors are putting in money in technology-based education infrastructure and applications to offline assessment and training institutions and application vendors like coaching classes and pre-schools. Some of the recent notable PE investments are Blackstone Group investing around $42 million in Everonn System, Matrix Partners investing $22.22 million in engineering coaching centre FIIT JEE, and Franklin Templeton Asset Management investing $11.11 million in Career Point Infosystems, a competitive examination preparation company. Education is a service, which when provided at a high quality consistenly over a period of time, will cause the parents, students and the society to want to contribute more to the success of the institution. The service, delivered in an inclusive environment, can bring out the best in the people, which translates into higher profitability and parent and student loyalty. Therefore, it is quite possible to both deliver high quality inclusive education and provide superior value to various stakeholders including return to investors. Despite the structural and regulatory challenges, private players are evolving innovative business models to trap cash flows from the business and offer PF firms lucrative investment opportunities. Key Words: Career Point Infosystems, Economic environment, Education market * Institute of Management Studies, Mahatma Gandhi Kashi Vidyapith, Varanasi (U.P), email: archanapandey2000@gmail.com Global Journal of Business Management
92 Archana Pandey India has emerged as one of the world s largest consumer of education services with a target population of more than 445 million (between age group of 5-24 years), which is expected to increase to approximately 486 million by 2025, far exceeding the combined target population in China (354 million) and the U.S. (91 million) in the same year. With public and private spending on education services in India aggregating approximately $100 billion per annum, and private spending on education having grown at a CAGR of 10.38% since, 1994 at constant prices (double the 5.11% CAGR for total private consumption spending during the same period at constant prices), the Indian education sector is on its way to become the next flavour of the reason for private equity investors. The potential for growth in the education sector is enormous, as demand for education is price inelastic and payments for an entire academic year are usually made in advance. Severe shortage of institutions delivering high quality education and training across segments makes this a timely opportunity. With about 50% of its population younger than 25, India is among the world s largest potential markets for education and training. To date, education spending in India is dominated by government spending but encouragement from the government has resulted in private sector participation. The weakness of the education system in India is visible through high illiteracy rates and low student retention rates in schools and colleges. The void created by limited aid from the Government at several levels of the formal education system has led to substantial private sector participation in India. Pedagogy standards in private schools significantly outpace those in public schools as they have more favourable student to teacher ratios, better infrastructure, content that supports learning, and greater use of technology and teaching aids inside classrooms. Additionally, private colleges and vocational training institutes are counteracting the problem of inadequate government colleges and universities, which results in too many candidates chasing too for few seats, by providing more options, thereby reducing dropout rates. Indians spend approximately $44.8 billion on education while the global education market is approximately $2 trillion. Approximately 26% or $11.5 billion of the industry in India is private and offers investment opportunities. Market growth across the Indian private education sector is in excess of 10% per annum and this sector is looking like a major opportunity over the next few years. The private equity and venture capital world, one of the hottest new segments where investors are now looking to invest in over the next six to eight months is the education sector. The sudden rise of popularity in this sector has come at a time when investors are looking to expand their investment options and cover different options that not only provide a good opportunity but also discover new possibilities. India s education and training sector offers private institutions an estimated $40 billion market, with a potential 16% five-year CAGR, says a report by CLSA Asia-Pacific Markets. According to another report by IDFC-SSKI, India s current spend on education is at 5% of the average household income, with a CAGR of 8.6% versus consumption growth of 3.2% Vol. 4, No. 1, June, 2010
Private Equity Investment in India with Special Reference to Education Sector 93 over 1995-2005. With an inefficient public education system, a growing young population, a burgeoning middle class (with the intent and ability to spend) and the price discovery it has seen over the past decade, we expect 14% CAGR in private spends on education ($80 billion by 2012), the IDFC report forecasts, using the $13 billion being spent annually by Indians on higher education overseas to highlight the pay power of the education-hungry Indians. RATIONALE OF PRIVATE EQUITY INVESTMENT The attractive and predictable rate of return in this sector is clearly serving as a magnet for PE investors and the mismatch between the sheer number of people to be educated and the dearth of quality education creates a tremendous short-term and long-term opportunity for education investments in India. While education as an industry may be different form many others, as an investment opportunity it s measured in much the same way. While one of the reasons for its sudden popularity is the fact that this segment is one of the few that are completely unaffected by a downturn, this segment also seems to be promising good returns to investors. One of the many reasons for this segment looking so attractive in India is, our nations undying hunger for education and knowledge, as well as an expected increase in spending power to fulfill these needs. An IDFC-SSKI report in January 2009 indicated that they expect the consuming class i.e. households with annual income higher than Rs 90,000, to grow from 28% of the total population in 2002 to 48% in 2010. The report expects 14% CAGR in private spends on education ($80 billion by 2012) with 13% CAGR for the formal education segments (K12 and professional segments) and 18% CAGR for the non-formal segments. A CLSA report also establishes the growing preference for private sector institutions. While just 7% of India s over 10 lakh schools are privately owned, they already account for 40% of the country s 219 million students enrolled. This is even though almost a 142 million children are not in the school system. In higher education, 77% of the 18,000 institutes are already privately owned. With such projected spending patterns and revenue generating opportunities, it comes as no surprise that everyone who can get it wants a slice of the pie. So far, private equity and venture capital funds have already invested over $300 million spread over the last few years in education-related companies. Almost 25% of the investment amount in the sector has gone towards the e-learning segment. PRESENT SCENARIO OF PRIVATE EQUITY INVESTMENT In an uncertain economic environment, private equity investors are finding the education sector attractive for long-term investments. From just three deals valued at $21.6 million in 2005, investment in the sector till October this year has increased to $238.7 million. Currently, PE investors are putting in money in technology-based education infrastructure and applications to offline assessment and training institutions and application vendors like coaching classes and pre-schools. Some of the recent notable PE investments are Blackstone Group investing around $42 million in Everonn System, Matrix Partners investing $22.22 Global Journal of Business Management
94 Archana Pandey million in engineering coaching centre FIIT JEE, and Franklin Templeton Asset Management investing $11.11 million in Career Point Infosystems, a competitive examination preparation company. Experts say the opportunities are far more in these tried-and-tested areas and they should now look at newer segments in education. PE investors should look at other support services, which range from text books for various exams, online helpdesks for students and teacher training institutes which are all part of the ecosystem for the business. Segments like K-12 and higher education are larger and are strong underlying growth drivers. They are profitable and barring any adverse change in legislation, PE investors will now begin to focus more on them. Over a period of time investors will begin to focus on either asset heavy models such as K-12 and higher education or asset-light models like content-based or franchisee models. The main driver of investment will be the scalability of the business model and exit options for investors. For scalability, the major bottleneck comes in the form of regulatory bottlenecks. The rules mandate that all formal education institutions in India to be run as not-for-profit centres under a society or a public trust. Any surplus funds generated in the process of running formal schools and higher education institutions have to be ploughed back into the same institution and no dividends can be distributed. Returns for private investors are fairly high with comparatively low earnings volatility. Typically, a PE investor looks for a timeframe of around three to six years and a good return is anything above twice the invested capital. Similarly, a venture capital investor would target a five times multiple over five years. A venture investor might be looking for a 10x multiple on his investment realising that the timeline to that exit is probably 8-10 years. On the other hand a true private equity investor might be just fine with a 4-5x multiple on his investment in a 3-4 year timeframe. Early stage venture investors have to be patient, especially in India where companies tend to take longer to scale than they do in the US. Exit options for private equity investors still remain nebulous. In the usual route, a PE investor looks for an IPO or M&A to exit from a particular investment. Analysts say since PE investment in education is still at its nascent stage, the fundamental focus of any company should be to create hopefully a large sustainable and profitable entity. With that as the goal, opportunities will present themselves either from the public markets or via an acquisition which could be from companies in peripheral space like assessment companies acquiring training companies and vice versa, or job placement companies merging with education companies, or offline and online companies merging or acquiring. Though there are opportunities to create large standalone entities in education in India, exits for private equity investors will come through a combination of IPO as well as acquisitions. The classic example is Educomp, the first education solution company to get listed on the bourses. In October 2000, the company received $2.5 million funding from the Carlyle Group, Vol. 4, No. 1, June, 2010
Private Equity Investment in India with Special Reference to Education Sector 95 a US-based private equity firm and five years later the company went public and the promoters have bought back the stake. Investments in certain types of education businesses like K-12 require slightly longer investment horizons than most typical PE investments. Also, given that the industry is fragmented with a few scaled up, investors will need to bring in operational skills to manage their portfolio businesses. Given these factors, analysts say one may see education-focused funds being set up along the lines of those funds that have been set up to focus on infrastructure investments. Table 1: P E Investment in education sector Year No. of Investment Value (in $ million) 2005 3 21.6 2006 1 8.1 2007 10 124.5 2008 11 127.2 2009 (Jan-Oct.) 8 238.7 Source : Grant Thornton Table2: Private Education Market in India, 2008 Market Size ($bilion) K-12 6.5 Higher Education 3.0 School Tutoring 0.7 Test Pre Entrance 0.5 Nursery and Pre-K 0.1 Source : Venture Intelligence FINDINGS AND SUGGESTIONS (1) Companies in the education sector either as a provider of technology and content solutions to the industry or a direct provider of education have emerged as investment destinations for private equity firms. (2) The market for e-learning is growing at a healthy clip. In the US, there has been a move in recent times towards online and digital courses and away from printed text books, which is being supported by large government funding. (3) The education sector, virtual and offline, has been attracting investments from strategic and financial investors. Education is an $80 billion (Rs. 3,84,000 crore) market in India split between the public sector ($30 billion or Rs. 1,44,000 crore) and the private sector ($50 billion or Rs. 2,40,000 crore). (4) Kaizen will invest in core education, including schools and colleges, teacher training schools, finishing schools, publication companies, and courseware and technology Global Journal of Business Management
96 Archana Pandey companies. It expects a gross internal rate of return of 30 per cent and has already invested in vocational space. Education is a service, which when provided at a high quality consistenly over a period of time, will cause the parents, students and the society to want to contribute more to the success of the institution. The service, delivered in an inclusive environment, can bring out the best in the people, which translates into higher profitability and parent and student loyalty. Therefore, it is quite possible to both deliver high quality inclusive education and provide superior value to various stakeholders including return to investors. Despite the structural and regulatory challenges, private players are evolving innovative business models to trap cash flows from the business and offer PF firms lucrative investment opportunities. REFERENCES Business Standard dated 29 September, 2009. Financial Express dated 12 December, 2009. Business Line dates 11 August, 2009. Vol. 4, No. 1, June, 2010