Tuesday, May 17, 2011

PE firms see future in informal education

Informal education has become a favourite investment destination for private equity (PE) players owing to the huge growth opportunities that the sector offers. They are targeting pre-schools and other institutes that help enhance the learning experience, or institutes that directly lead to employment opportunities.

Owing to the largely unregulated nature, this sector offers PE firms flexibility to do business on their own terms and utilise the profits of the business for their own. Education is one of the top three investment destinations for private equity players in India.

About 95 per cent of this sector is unorganised and presents greater investment opportunities for players through acquisitions. A KPMG report on education sector said that the market size for education sector would cross Rs. 2 lakh crore (Rs. 2 trillion) by 2012; formal education (K-12 and higher education) would constitute Rs. 1.8 lakh crore (Rs. 1.8 trillion) would constitute and the informal sector (pre-schools, coaching institutes and vocational courses) would constitute about Rs. 27,000 crore (Rs. 270 billion).

Private equity firms generally exit these investments through a strategic sale to another company or an IPO. The fastest growing verticals are vocational courses and coaching institutes. In 2009, around Rs. 556 crore (Rs. 5.56 billion) was invested in companies such as Tutorvista, Career Point and FIIT-JEE, among others. Career Point, the only listed company in this space, raised around Rs. 110 crore (Rs. 1.1 billion) through an IPO in 2010. Intel Capital, a technology venture capital firm has also invested in education through Vriti Infocomm, an e-learning platform that provides various online facilities such as online tests, course and also classroom support solutions for schools, colleges and other institutes.

Most PE firms prefer an asset light business model, which entails little investments on the asset-side of the balance sheet, and investee companies usually lease instead of buying assets. “The competition situation is likely to remain sharp in the country because of which the pressure on the students is going to be very high. As most of the places are leased, we can start several courses from the same centre, providing economies of scale,” said Mr. Andrey Purushottam, Executive Director, Helix Investments. Helix Investments invested close to Rs. 50 crore (Rs. 500 million) in Mahesh Tutorials in 2007.

The advantage of such investments is that they provide low-exit barriers to PEs as the sector is unregulated and investments smaller. “Though opportunities for going the whole hog exist, we ensure that our funding philosophy reflects adequate and optimal funding in the investee,” said Mr. Harinder Sawhney, Managing Director, JM Financial Investment Managers. J M Financial Investment Managers has invested about US$ 8 million in UEI Global, which is into providing training for management and hospitality courses.

Source: Business Line, May 17, 2011
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