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PE funds are investing in for-profit institutions only. These are mostly private institutions that follow international curricula such as international baccalaureate. National and state examination boards grant affiliation only to those schools that are owned by non-profit organisations or trusts. Maharashtra and Haryana are among the states that allow schools to be operated for profit.
An acute demand-supply gap has created a vast opportunity for players to exploit this space. Shantanu Prakash, managing director of Educomp Solutions, the country’s largest K-12 education company, said, “India still has over 120 million children still out of school and there is a shortage of 200,000 schools in the country.”
Almost 60 per cent of India’s schools are only till the primary education level.
Rajesh Singhal, managing partner in Milestone Religare Investment Advisors, said this huge demand might see about 10,000 new private schools coming up in two years. The joint venture between Milestone group and Religare Enterprises invests in multiple verticals, including the education sector.
“We are already evaluating several opportunities in the K-12 segment,” said Singhal, whose company has so far invested Rs 25 crore in IMS, a company that provides test preparation services for GMAT, GRE, CAT and similar exams for professional courses, and Resonance Eduventures, a coaching institute.
According to Chennai-based Venture Intelligence, PE funds invested around Rs 825 crore in the Indian education sector during April-June this year, accounting for 7 per cent of all PE investments in the country.
This includes Rs 50 crore invested by Sequoia Capital India and Song Investment Advisors in K-12 Techno Services, which manages a network of over 50 schools owned by Hyderabad-headquartered Gowtham Educational Institutions.
In another instance, Reliance Equity Advisors, the PE arm of Anil Ambani's Reliance Capital, has put in an undisclosed amount in Haryana-based Pathways World School.
While the major players in the K-12 segment include Educomp Solutions, Manipal K-12 Education, Everonn and Radcliffe School, there is a big need for players who can provide services on a pan-India level.
A scalable model is what attracts investors. “As of now there are very few players who cater on a national basis and thus, this gap has led to credible opportunities for more new players. Preferences for private schools and colleges are driving this sector,” said Meena Ganesh, founder and chief executive officer of Manipal K-12 Education.
Although some regional players like D Y Patil Schools and G D Goenka Schools have already started the process of becoming broadbased, it will require a large investment to eventually do so, according to Sandeep Aneja, managing director of Kaizen Private Equity, the country’s first education-focused PE fund.
“Not all regional players will have the financial muscle to expand pan-India because K-12 is an asset-heavy model. However, school management companies could well thrive pan-India and have a broader base of schools under contract,” said Aneja whose fund is presently raising Rs 500 crore. Kaizen is currently evaluating three companies in the K-12 segment and will make an investment within 120 days, added Aneja.
With the education space taking off, investors can expect to recoup their money in 3-8 years, with an average internal rate of return of about 25 per cent CAGR.
Several private education companies are in the process of raising capital at a substantial premium to their listed counterparts.
“This is a strong reversal of valuations in 2008 and 2009, when listed firms were trading at a stronger premium and set the benchmark for private sector deals. This could either indicate that managers in PE and venture capital firms believe private firms are likely to grow faster or expect stronger industry growth rates,” said Ankur Rudra, who covers the technology and education sector in India for Execution Noble, an investment bank.
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