PE players eye education sector

India’s education and training market is a $40-billion opportunity for investors.

Around 350 private equity and venture capital (PE/VC) firms in India are looking at the education sector. Sitting over $10 billion, they plan to invest $500 million (Rs 2,300 crore) in the sector.

India’s education and training market was a $40-billion opportunity for investors with schools and colleges capable of attracting around $28 billion, said PE players. No wonder investments in the sector are likely to double in 2010 compared to 2009. The sector figures among the top three investment destinations among PE players.

In 2009, PE investments in education saw a three-fold rise. According to data from Grand Thornton, PE investments in the sector went up from $35 million in 2008 to $108 million till October 2009.

“Education is likely to see significant investor interest in 2010 as this is the year when some education sector reforms are likely to be implemented. Investors sitting on the sidelines are waiting for cues from policy-makers,” said Sandeep Aneja, managing director, Kaizen Management Advisors.

Despite this, there are certain inherent hurdles, one being the tight regulation of the education sector. Due to this, PE players are looking mostly at ancillary services (infrastructure, technology and services segments) as investment in trusts managing schools is not allowed. A recent example is the Rs 172-crore investment made by India Equity Partners in IL&FS Education and Technology Services.

Analysts say most schools hive off the infrastructure-owing entity into another company, different from the trust. The trust pays the lease amount on yearly basis. “The leasing company can charge higher rent and thus the trust manages to break even just by transferring profits to the leasing company,” said a Mumbai-based education analyst.

Vocational training, supplementary training, examination training and stationary business are also attracting investments. In 2009, around $121 million (around Rs 556 crore) was invested in eight companies, including TutorVista, Career Point, FIITJEE, ITM Group and Edutech.

Experts say 75 per cent of education spend is coming to the K-12 and the higher education segment.

Said K Ganesh, a serial entrepreneur who raised over Rs 200 crore from leading investors such as Sequoia Capital, LightSpeed and the Manipal group: “Education is the second-largest spend for an Indian family after food and grocery compared to the seventh-largest in the US, below DVDs and music. The potential is large.”

Global education major Pearson must have had this in mind when it took a 17 per cent stake in TutorVista for $12.5 million at a stage when the company had revenues of less than $5 million.

However, according to players and analysts, the Indian education sector lacks big-ticket investment opportunities. “Education is one of the larger components of our GDP (in every economy, education and healthcare are large sectors). However, the size of the sector masks the underlying issue that most assets are small. With PE firms looking to invest over $25 million in an asset, there are limited number education assets that can deploy that much capital,” said Karan Khemka, partner, Parthenon Group.

Added Aneja of Kaizen, “While the education sector is being talked about a lot, it has not seen many large transactions because of the size of the companies in the sector. Most companies are in the Rs 20-60 crore revenue range and seek Rs 30 crore on an average. Most large deals seeking large amounts have unrealistic plans. There are a number of top quality firms in the small to medium range seeking PE funding.”

That apart, some players are also concerned about the hype surrounding the education sector, which might push up valuations. “If there is a lot of hype around the education sector being a viable option for PE players, it may push up valuations,” said Kartik Parija, managing director, Zephyr Peacock India.

However, big hindrances, say PE players, are the regulatory issues. The resource gap in higher education as identified by the Planning Commission stands at Rs 220,000 crore and the government plans a public-private partnership approach to bridge the gap.