The Indian education sector holds a $40-billion potential, but few private equity (PE) players have ventured into this sector, despite the sector?s projections of a 16% CAGR for five years, with 25 PE deals every year. In reality, PE deals have barely inched up in the last three years. A slew of regulations, lack of companies with the ability to scale up and the occasionally non-profit nature of the sector have discouraged many PEs from venturing deep into education.
According to Venture Intelligence data, the sector saw 8, 9 and 10 PE deals in 2007, 2008 and 2009, with $75 million, $100 million and $123 million investments, respectively. In 2010, only four deals have been concluded yet.
Says Ashish Gupta, managing partner, Helion Advisors: ?Investment this year too will not be anywhere near the amount the sector actually needs for enabling quality education to Indian consumers.?
Regulatory restrictions in formal education (K-12) and higher education block investment, say investors. In India, any formal education institution has to come under a non-profit structure where the bulk of the assets is controlled by a trust?and no PE player loves a not-for-profit trust. K-12 is estimated at $20 billion, the largest chunk of the education market.
Says Jacob Kurian, partner, New Silk Route Advisors, ?The trust or charitable society structure creates hurdles to a profit-oriented business. They are great if you want to fiddle with the system, but PEs usually require very high levels of corporate governance.?
Says Anand Sudarshan, CEO, Manipal Education: ?PE investments have so far been on service organisations (mostly technology players), coaching classes, online education and training institutes. No degree-granting institution has received funding.?
However, according to Jayaram K Iyer, spokeperson at the Loyola Institute of Business Administration), scalable verticals like online education do attract PE funding. According to reports, e-learning receives a quarter of PE funds in education. Less-regulated players in vocational studies, test preparation, distance learning, technical training, play and pre-schools too have attracted PEs.
In the biggest PE deal of 2010, Manipal Universal Learning (MUL) received $43 million from PremjiInvest. An education and training company, MUL owns institutions abroad, where profit-based models are allowed. However, in India, it offers only training services.
Investors claim that it is difficult to find credible pre-school and test preparation companies. ?Most players have only 1-5 centres and very few have scaled to a stage when they become attractive to PEs,? says Ashish Gupta of Helion.
According to a Venture Intelligence report in 2009, PE players had called for a regulatory framework for the sector. They sought guidelines for private participation in education and an education tax or cess on surpluses from the for-profit sector to finance tuition and loans for economically backward students.
The education sector expects some reforms in the sector this year, which would push up the number of deals. The investor community, however, is in a wait-and-watch mode. ?The education sector has been strangulated so far, which the reforms will hopefully address. But we will have to wait and see,? says Manipal Education?s Sudarshan.