VCs find education a fail-safe option

Bangalore: When Mumbai-based IMS Learning Resources Pvt. Ltd went hunting for capital earlier this year, the test preparation firm was surprised by the eagerness of investors to back it.

Venture capital, or VC, deals between January and November had almost halved over the year ago because of the global slowdown. Most VC firms in India began as technology-focused, early-stage funds, but start-ups in the sector were hit hard by the downturn. These VCs are now diversifying their investment thesis to hedge risks and education features in their “to-do” list.

Investors see education as a recession-proof industry, especially in a country where an expanding middle-class puts great store by quality education.

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“That we are an education company certainly worked for us. There is a lot of hype about safe returns in education,” said Kamlesh Sajnani, managing director, IMS. It raised Rs25 crore from Milestone Religare Investment Advisors Pvt. Ltd, an education- and healthcare-focused fund, in its first round of funding in September.

In a report on the Indian education sector for 2008-12, brokerage CLSA India Ltd said opportunities for private-sector education would go up to $70 billion (Rs3.27 trillion) by 2012 from $50 billion now. School education would touch a market size of $29 billion by 2012, tutoring would reach around $9 billion, and private professional colleges nearly $12 billion, it said.

“This sector offers enough opportunities to deploy capital. Education lacks good-quality infrastructure in the country and investors like us have the opportunity to build these capacities,” said Rajesh Singhal, managing partner, Milestone Religare.

Milestone Religare is set to announce its second deal in the sector in a few days. Singhal didn’t give details.

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Meanwhile, India’s first education-focused private equity (PE) fund is set to start investing from January. Kaizen Management Advisors Pvt. Ltd, a Rs350-crore domestic fund established in August, will primarily invest in what it calls the “core education” segment—kindergarten to class XII, colleges, universities and vocational training institutes. It expects an internal rate of return of 25-30%. “I think a lot of schools’, colleges’ management companies (such as the Delhi Public School Society) that are being built will go for an initial public offering,” said Sandeep Aneja, co-founder, Kaizen. “Quite a few will become target(s) for some sort of merger and acquisition activity.” He added that 10 other international investors will enter the education sector in India over the next year. Kaizen will start raising an international fund in 2010 with a corpus of $120 million for education.

Some investors, however, say it will not be easy for large players to get into the Indian education sector. As per Indian regulations, any school or college that awards a government-recognized certificate to its students has to be a not-for-profit trust.

An investment into such a business model would not be feasible for a PE investor looking for good returns. Some investors keen on making deals in the education sector have worked around this challenge by investing in firms that provide services to educational institutes.

So far, investors have preferred businesses such as tutoring and ancillary education services such as publication, online learning and information technology infrastructure, and firms that make software for self-learning or teaching.

Gopal Jain, partner, Gaja Capital Partners, a PE firm, said it seemed the government was fighting against entrepreneurs in education. There is just a small part of the education spectrum in which entrepreneurship is possible.

“The sector is yet to see de-licensing. How will investors see deal flow? Wrong sort of people are entrepreneurs in education. Not-for-profit structures involve off-balance sheet settlements. We (investors) are subjected to various controls and can’t channel off balance sheet settlements. How do investors participate?” Jain said. Gaja Capital has backed firms such as Career Launcher India Ltd and Educomp Solutions Ltd.

Valuation also plays spoilsport. Investors are often reluctant to strike deals in education firms as their valuations at times are higher than that of the public markets.

Most investors still seem to prefer education business models such as online courses, service providers, institutes and test preparation firms to school or college management or trusts.

“There are scalability issues even in these. Direct-to-customer services may not be scalable. It needs to be a higher education play as well as one that can generate volumes,” said Deepak Srinath, director and co-founder, Viedea Capital Advisors Pvt. Ltd, an investment bank currently working on two education sector deals in India.

Graphics by Ahmed Raza Khan/Mint