Bangalore: While the latest report by the Associated Chambers of Commerce and Industry of India indicates that Rs 4,200 crore will be invested by venture capital and private equity (PE) firms in the education sector over the next three years, investors are not quite sure if this could happen in the current regulatory environment.
Investors say that though education has been a must-have in their list of sectors, primarily on the basis of the demand-supply gap, the country’s regulatory restrictions make it difficult to make a profit.
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The core education segment—K-XII (kindergarten to class XII) and higher education—is controlled by the government to prevent commercialization and profit making. Furthermore, the regulations require the plough-back of all surplus capital into the institutions, making it unattractive for returns-seeking investors.
Although fees in private schools are not regulated, the institute has to be run by a trust, which makes it difficult for investors to take returns on investments or utilize surplus funds to scale up operations.
“Only a fraction of the potential number will go into education, if the right ecosystem is not available,” said Gopal Jain, managing director at Gaja Capital Partners, one of the most prominent education investors in India. “With regulatory constraints, lack of clarity on the RTE (right to education) Act, absence of rules on land, there is hardly any framework available to attract PE funding. However, given the current scale of foreign direct investments and PE in India and the needs of the sector, a multiple of this $1 billion number could flow in given the right ecosystem.”
As much as $600-700 million could be invested by 2014, said Sandeep Aneja, managing director, Kaizen Management Advisors Pvt. Ltd, an education-focused PE fund.
India has the third-largest education system globally, after China and the US, with one million schools and 18,000 higher education institutions, according to Venture Intelligence’s latest report on education, released last month. With a population of around 540 million in the 0-24 age bracket, it is also the largest education market in the world.
The government currently spends around 4% of the gross domestic product (GDP) on education, which is to be increased 6% to Rs 2.7 trillion in the 11th five-year Plan from Rs 43,500 crore in the 10th Plan.
Given this significant gap between demand for quality and relevant education and supply, there is a huge potential for private investment. Accordingly, PE interest in this sector has also grown significantly.
The sector can broadly be classified into three segments—formal or core education, which includes schools, colleges and universities; non-formal education, comprising preparatory schools and coaching institutes for skill development or vocational training; and content and technology enablers for the first two.
While K-XII and higher education are the biggest segments in education, the majority of investments have been in the relatively unregulated allied businesses. Test preparation, content development, pre-school chains, technologies for education and vocational deals are more attractive from the regulatory standpoint, said Vivek Gupta, partner, mergers and acquisitions practice, BMR Advisors.
“The unregulated ancillary businesses continue to be attractive,” he said. “Unlike in other sectors, opportunities continue to be high in education despite quite a few companies getting invested in the same space. This is largely because the scope of growth and scaling up is immense. The sector has not seen a shake-out of leaders and followers.”
That’s because the sector is yet to be organized, he said.
Other upcoming attractive models include teacher training, special courses for students, information technology (IT) infrastructure management, content development, hostels, transportation services and other such services for formal education institutions.
Investment bankers say things may change a bit with brick and mortar models becoming attractive for investors as these are asset-driven business. While banks have so far catered to their funding demands, rising interest rates may nudge them towards institutional investors.
“A large portion of the investment will go into the brick and mortar models, which are currently facing demand supply mismatch,” said Mohit Khullar, vice-president, Equirus Capital Pvt. Ltd, an investment bank. “However, given the asset-heavy play, these investments will be financed by a mix of debt and equity.”
Investors say the education space will be dominated by mid-ticket investments as there are only a few companies that can absorb large-ticket investments of over $30 million to $40 million.
“Small to mid-ticket size, $10 million to $20 million deals, will dominate the space,” said Anant Kulkarni, managing partner at PE firm Milestone Religare Investment Advisors. “Beyond that, besides the brick and mortar model, there is not much of an appetite for capital consumption.”
There are quite a few vocational training and test preparation companies looking for the next round of funding, he said.
The sector needs more patient capital as education is different from industries such as IT/ITeS (IT-enabled services), where an investor can make an exit in two-three years, experts said. Only a few investors are ready to wait for a longer period. There are returns in such investments for those who do, said BMR’s Gupta.
“On the demand side, potential is limitless. If one is executing right, there are no challenges to scaling up. The market is huge,” he said. “Investors need to have patience of at least five years. They can’t get out of these investments in two to three years.”
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