Playschool business no more childs play

Written by Debojyoti Ghosh | Debojyoti Ghosh | Updated: Mar 4 2011, 14:29pm hrs
The playschool business has come of age with venture capital (VC) and private equity (PE) players getting serious about the segment. Lured by high growth potential and low entry hurdles, they are being drawn towards the $500 million Indian preschool market thats still largely unorganised. While the vast majority of the education sector in India is restricted by not-for-profit caveats, the preschool segment is not as regulated, making it an attractive destination for investors funds.

The increasing number of double-income families and demand for quality education for children are fuelling the growth of preschooling in the country, which is expected to double in size by 2012. The preschool market, growing at a compound annual growth rate (CAGR) of 35%, is expected to touch $1 billion by 2012, according to the Kaizen Education Report, 2010. Kaizen Private Equity is one of Indias PE funds focused on the education sector.

Recently, the Bangalore-based day care and education centre Your Kids R Our Kids (YKROK) received R10 crore in its first round of funding from early-stage VC firm India Venture Partnership (IVP). The funds will be used to take the chain across the country. YKROK, which currently has a capacity of more than 2,000 children across 12 centres, is planning to have 65 centres across 10 cities in the next three years. By the end of this year, YKROK plans to raise additional funds.

Last year, leading playschool chain Tree House Education raised R31 crore from the US-based Foundation Capital, which has over R11,000 crore of assets under management. Investment firm Matrix Partners India, which has R1,500 crore under management, has also invested R59 crore in the playschool chain, in two tranches. Other players in the industry that are in talks with PE funds include Kangaroo Kids Education, Hyderabad-based DRS Kids and Zee Learn, of which Kidzee is a division, according to a person familiar with the development.

Industry experts say funding required to start a preschool is substantially lower than the amount needed for higher education institutes, which attracts investors towards this segment. In a franchise model the initial capital cost to set up a preschool is R5-10 lakh. Bharat Kapoor, co-founder and managing director, YKROK, says This is a relatively scaleable business and does not require too much capital to scale up.

However, the market is largely fragmented and there is a clear dominance of neighbourhood schools. This dominance has emphasised the need for quality education and also spurred the growth of preschool chains. We have seen quite a few chains, in the last few years, enjoy great success. Fortunately, with the right model and vision, this success can be sustained in the long run, says Harshal J Shah, chief executive, Reliance Venture Asset Management. In the months to come, the education system will indeed see fresh injection of funds and some solid ideas that will be incubated through VC funding, he adds.

The major players in the organised sector include Kidzee, Indias largest preschool chain, Euro Kids International, Tree House Kangaroo Kids and Shemrock Schools. Currently, there are 11 major playschool chains and about 10 small players dominating the space.

Though investors feel the overall scenario for the playschool market in India is positive, there are several factors in play like maintaining quality, and finding the right team and the differentiated model that can be scaled up. Sandeep Aneja, founder and MD, Kaizen Private Equity, says it is difficult to maintain quality in a franchise model. The quality of teachers and support staff hired by each franchise cannot be controlled easily, he says, adding that when the business is scaled up, quality often suffers.

Kaizen PE is in talks with market players but has not finalised any deal yet. We are not just looking at the preschool model as a standalone opportunity. It has to be aligned with primary schools, says Aneja.

As many of the current major players have franchised their brands and curriculum, quality is often erratic. Navneet Gosal, advisor, India Venture Partners, feels quality is one of the key differentiators in the playschool business. Parents have to feel good about sending their children to the preschool. They have to feel that the kids are learning and it is a safe, nurturing environment, he says.

However, investors are optimistic that the sector will assume even greater importance as a lucrative model for investments in the years ahead. With a growing number of working women and the economic necessity for two incomes, the demand for playschools will remain robust, says Jacob Kurian, partner, New Silk Route, a private equity firm.


Expertspeak

Harshal J Shah,

CEO, Reliance Venture Asset Management

Preschools, much like any segment of the educational sector in India, tap an extremely demanding and growing market. What makes preschools a very attractive place for VC and PE players to park their funds is the fact that the demand can be tied to lucrative profit margins

Jacob Kurian,

partner, New Silk Route

Today parents have very elastic expense budgets for their kids and is prepared to pay if someone can create and build a high-quality chain. Many of the current players have just franchised out their brands and curriculum and quality is often erratic

Sandeep Aneja,

founder and managing director,

Kaizen Private Equity

In the playschool business, it is difficult to maintain quality in a franchise model. The quality of teachers and support staff hired by each franchise is a difficult task and cannot be controlled easily. With scalability of the business quality is lost in most cases

Navneet Gosal,

advisor, India Venture Partners

Worldwide, preschool models have been very profitable for investors. We have not seen many exits in India in this sector yet due to the early-stage nature of the market but we do project very profitable ventures for investors

Statfacts

Nascent stage

* The preschool market in India is estimated at $500 million

* Growing at a CAGR of 35%, the market is expected to touch $1 billion by 2012

* At present there are 11 major playschool chains and about 10 small players dominating the space

* Lack of government regulations in the sector creates a conducive investing environment