Hive off infrastructure to attract funds, have a scalable model.
When Chennai-based Everonn Education begins setting up international schools in the country next year, it plans to do so as a private limited entity under Section 25 of the Companies Act, 1956, and not as a trust. The reason: The company sees this as an alternative way of having a scalable model (which the trust structure does not allow as its bars payment of dividends).
Increasingly, educational institutions in the country are taking innovative routes to expand. For example, schools that cannot go for the Section 25 option have begun turning to “smart equity” from private equity (PE) players to expand access to new technologies, build new set of services and add resources.
This explains the $22-million (100 crore) deal that Reliance Equity Advisors — Reliance Capital’s PE arm — struck with Pathway World School recently. The stake acquired was, however, not disclosed.
Pathways World School is a group of International Baccalaureate curriculum schools from kindergarten to Class XII (K-12) in Gurgaon, Aravali and Noida. It will use the money to expand capacity and set up two more schools in the national capital region.
This was the first PE investment in any school in the country so far. Most PE investments have either been in education technology or coaching companies.
Some recent investments in the education space include Rs 200 crore by Premji Invest in Manipal Education, Rs 60 crore in Resonance Eduventures, and India Equity Partners’ Rs172-crore investment in IL&FS Education and Technology Services.
And, there are more deals waiting to be done.
For instance, Global Education Management Systems (Gems), which runs 100 schools worldwide, has sought PE money for a few of its schools. The group, which has been in India for around six years, is looking for funds to expand the number of its schools from 17 to around 100 over the next five years. Gems owns schools, takes management contracts (managing schools for others) and also has a consulting and audit advisory division.
Manipal Education’s Manipal K-12 is also scouting for Rs 100-crore PE funding. Manipal K-12 will tie up funds in the next few weeks to expand the number of schools from 11 (of which four are in Nepal) to 100 over the next five years. The group plans to expand across Asia.
Focus on ancillaries
“PE players mostly look at ancillary services (infrastructure, technology and services segments) as investment in trusts that manage schools is not allowed. In fact, many missionary trusts or individual families which have been running institutions the conventional way are exploring the PE route to raise funds. Also, with parents giving importance to factors like a school’s infrastructure and extra-curricular activities, educational institutions are choosing various parameters to build brands,” said a Mumbai-based analyst.
“You cannot expect a trust to be an expert in all aspects of running a school. One method of effectively running the school is allowing services companies to provide infrastructure support or content. This is where a PE player helps the school management by picking up stake in infrastructure services and providing the much-needed capital to scale up,” says K Ganesh, founder and chairman of TutorVista.com, an online tutoring company. Ganesh has joined hands with Manipal Education and Management group to run K-12 schools.
Manipal K-12’s model involves getting into a management contract with trusts for a fee. In such an arrangement, Manipal K-12 takes care of all aspects, including appointment of principals and teachers, curriculum, and managing information and communication technologies.
“Like any other company, K-12’s business is asset-heavy, as setting up schools is a costly affair. PE investors are keen on this space but their knowledge and understanding of the sector is limited. Also, the sector has a soft gestation period and profits do not double in a few years. PE investors should understand this and stay invested for over seven years,” said Ajey Kumar, country head for Gems Education.
Innovative structures
There are three ways of funding a school project — the promoter's equity or trust; private equity; and debt. Traditionally, it’s been either trust or debt.
Setting up a school requires infrastructure and land. For 2,000 students, a player would require Rs 50-100 crore depending on the location.
The business gets divided into a property company and a management company. Since trusts can't sell stakes (they are not allowed to give dividends), PE players pick up stake in either of these companies, which are registered as private limited companies.
“Under law, all schools are run by a trust or a society. But they hive off the infrastructure-owing entity,” said an industry player. The trust pays the lease amount annually. The leasing company can charge higher rent and thus the trust manages to break even just by transferring profits to the leasing company.
Internationally, the practice has been there for long, but it’s picking up in India now. Players say schools are looking at this model as it allows good “division of labour”.
Ganesh believes the concept of public private partnership and the Right to Education Bill will attract more players to the segment.
Educomp, one of the largest players, follows a similar model. It recently tied up with Lavasa Corporation. Under the deal, it will facilitate independent trusts to set up four educational institutes at Lavasa. The company plans to build 150 world-class schools by 2012 by providing infrastructure and education content.
Kindergarten-12 (K-12) is the most attractive segment, as a student once acquired usually stays for 12 years. This will be a direct beneficiary of rising income levels of the middle-class in India. According to a report by Kaizen Management this January, the K-12 segment comprises approximately one million schools.
“A lot of trusts running schools are looking at bringing a corporate structure. Many of them are turning to service providers who can bring turnkey solutions,” said an industry player.
For PEs, there are good exit options. They are already talking about setting up companies that can be sold on a standalone basis. The other options are sale to a larger fund or disinvestment through an initial public offer.
