What’s your outlook on India’s K-12 sector?
India has the largest enrolments in K-12 schools globally with more than 276 million students attending classes from pre-primary to secondary. It is also one of the very few markets which have had a solid growth in enrolment numbers (2.4%) year on year. Today education takes the largest share of non-food expenditure in an urban Indian household.
Increasingly, state and central governments, education boards have also started to take more a pragmatic approach towards regulations in the sector – paving way for more private capital to flow in.
Historically very few PE Investments / M&A Activity have happened in the Indian K-12 Space, While globally it is one of the preferred sectors – why is that ?
Despite very attractive macros, the number of scaled private K-12 businesses in India is dismally low. Out of the more than 1500 companies listed with the National Stock Exchange, less than ten are directly in the education space and even fewer in the K-12 space. This state of private K-12 businesses in India can be attributed to the absence of quality growth capital. We attribute this to the following three main reasons:
- K-12 investment is typically a long gestation investment. Schools take minimum 5-7 years to reach scale and to start generating returns. There is not much patient capital available in the market.
- Secondly, private growth capital requires clear and multiple exit possibilities. The primary and secondary market for K-12 business is not deep enough.
- Finally, the regulatory environment has been the biggest overhang on the sector.
In the last few months, we have seen a few large size cross-border M&A transactions in the K-12 space. LoEstro Advisors was involved in a few of them. Can you share your views on how global investors are looking at the Indian K-12 Space ?
Globally, there are at least a dozen K-12 chains which have rapidly grown over the last decade or so. Key amongst them would be Nord Anglia Education, Cognita, Inspired Education, GEMS and International School Partnerships apart from the education platforms of various large PE funds like KKR, Barings PE, CDC, etc.
In the last few months, we have seen many of the largest K-12 investors making big bets in India – Nord Anglia Education, Morgan Stanley, KKR and Cognita. Each of them have big plans for the Indian market and are looking to acquire quality schools. Given the sheer attractiveness of the market, other global operators will also look to actively participate.
Do you also see private equity investors and domestic K-12 operators increasing their allocation for investment into the sector?
Apart from a few investments, which PE funds made 5-7 years back, they have stayed away from the education sector off-late. This has been primarily driven by a lack of defined exits through either IPO / secondary market sale. With the M&A space in the sector now showing traction, we believe that the PE investors will start investing growth capital.
As a K-12 entrepreneur, what are the things one needs to do to attract investment from domestic and foreign investors?
Fundraise / M&A in K-12 space is a little different from other sectors. Like other businesses, while solid business fundamentals are a must, in K-12 space – including learning outcomes, financial metrics, stakeholder satisfaction, a few other aspects are important to make the business investible. They are:
Investible Structure. CBSE and most state governments provide school licences only to not-for-profit entities – societies, trusts, Section 8 companies. By their nature these entities one needs to keep reinvesting any surplus generated from the business and cannot return it to the investors.
To overcome this challenge, most forward-looking promoters have implemented the Opco-Propco-Manco (Operating Entity – Property Company – Management Company) structure. The operating entity is the not-forprofit entity with the education license. The property and management company provides infrastructure and services to the operating entity and thus create a conduit to generate returns for the investors.
Compliance and Governance. K-12 businesses need permissions and recognitions from multiple local, state and board authorities to operate. Compliance with these requirements are extremely important for potential investors.
Realistic Valuation Expectation. While valuation gap is an issue which exists across sectors and businesses, the absence of listed companies or the relatively fewer number of transaction make it even more difficult for K-12 business. Market participants, in general, tend to use multiples of relatively similar sectors to start with and use arguments like regulatory issues, non-cyclical nature to increase or decrease the multiple depending on which side of the deal they are.
Additionally, in cases where the real estate is also part of the deal, apart from the school operations, the divergence between the business value and the real-estate value is a major issue.
As a firm, how does LoEstro help K-12 operators and investors?
LoEstro has three different service lines – Advisory, Fundraise and M&A. On the advisory side, we work with operators to help them make their business more marketable including implementing the right structure, compliance and governance framework. We also work with investors with post-transaction integration and portfolio management.
On the fundraise and M&A side we work with operators and investors to find them the right partner, structure the deal and make it a win-win situation for everyone.