PE players eye classrooms with difference!

Having proven its mettle in giving fillip to several industrial sectors, private equity funding is scripting success in education sector. With a potential to fill the gap, PE funding has caught the fancy of franchise brands, with new-age franchisors following the suit.

ONE of the recent developments in the PE scenario in India is its burgeoning focus on the education sector. The perennial and recession-proof nature of the Indian education sector has been a steady success in drawing the interest of big ticket private equity investors. Touted to be USD 80-billion market, the number of private equity deals in the education space has grown manifold in the recent years and is expected to touch crescendo.

As per experts, the Indian education industry is an attractive asset, given the amount of investment being witnessed in this sector. According to research firm Technopak, the schooling market is projected to be more than double in value in the next 10 years. From USD 28 billion (in 2008) it is likely to touch USD 66 billion by 2018.

Smart investment

With such a mammoth propensity, pumping money in education has become quite a trend and is considered to be ideal one. Already, over USD 300 million has been invested in educational ventures since 2006 and more such investments are in the pipeline. Notably, a lion's share of investment has been through PE funding. According to Venture Intelligence, one of the leading sources of information and analysis on private equity, venture capital and M&A in India, eight deals worth USD 121 million were sealed in 2009, as compared to just two worth USD 73 million in 2006.

However, the million dollar question is why to opt for a match-making with PE firms despite other options? Shedding light on the trend of PE firms going the education way, FinPac, Financial Information and Resources Pvt. Ltd, states: “The advantage of having PE funding means that the process involves advice, along with money. This puts PE funds ahead of other traditional funding modes of bank loans. Further, in bank loans, there is an obligation of fixed amount to be paid in terms of interest and loan repayment on periodic basis. In case of PE funding, there is no such obligation.” While Harminder Sahni, Managing Director, Wazir Advisors Pvt. Ltd, says: “Other sources of funds for a franchisor/entrepreneur can be his own funds, family, friends and banks. All the 'other' sources have their own limitations, while PE, with its structure ecosystem in the market, offers an excellent alternative to the franchisor.”

So, which are the segments that are witnessing upsurge in PE investments? According to experts, the Indian education segment can be divided into regulated and unregulated modules. While the regulated format includes K-12 schooling systems, the unregulated format comprises vocational aspects. This includes coaching classes, numerous new-age concepts like abacus, handwriting improvement, aviation, along with tutorials, preparatory classes etc. Sunil Jain, Partner, Sprout Capital Advisors LLP, explains: “Majority of the PE deals are happening in the non-formal education segment, given the 'not for profit' regulatory hurdles in the formal education segment. Presently, the average size of PE investment in the education sector in India is around USD 11million and the past 18 months have seen about 36 deals, making it to USD 400 million.”

A remarkable trend that has been making waves in the PE landscape is the emergence of new-age education concepts. These concepts have lately caught the attention of PE firms. Franchisors, too, taking a cue from these new-age concepts, are following the suit. One such brand is Aloha India. Doling out niche concepts such as Abacus and WriteRight, K. Kumaran, Chairman and Managing Director, Aloha India, has his eyes now on PE funds. He says: “We have plans to dig into PE funding in the future. A key reason to opt for the private equity route is infusion of capital, talent as well as strategic thrust. Any franchise brand that has reached a certain level of brand building and expansion and a franchisor, who is looking forward to take his brand to a next level, should take to PE funding.”

Fortune for franchising

Given the tendency for escalation and expansion in this segment, several prestigious educational franchise brands have already 'bitten the bait' of PE funding. As per a report by Venture Intelligence, PE deal data base, NIIT, Career Launcher, VETA and Tree House Play School have had investments through PE funding. So, what are the factors that are propelling franchisors to take to PE investment? Sandeep Aneja, Founder & MD, Kaizen Management Advisors, asserts: “I believe franchisors need a lot of PE funding, as they can help in overall reduction of capital requirement from the company.”

When a franchisor is considering PE funding, what are the paybacks/benefits that he should expect? Remarks Lina Ashar, Founder, Kangaroo Kids Preschools and Billabong High International Schools: “PE funding, with an aim, to serve kids, can radically change the dynamics of education in our country. It can help organisations like ours to strengthen our research and bring in a paradigm shift in the way education is perceived in our country. Also, it can help us support the franchise partners in the most effective manner.” While Kumaran quips: “PE funding can't be restricted only in aiding a franchisor monetarily. As a process, it is diverse and goes on to create an impact on the brand as well. With external funding, a franchisor can focus on brand building, expansion and local activity. This in turn is beneficial for franchisees as well, simply because they can have a fair share of the developmental as well as brand-building programmes!”

Even as the benefits for franchisees are many, however, there are several aspects that a franchisor must check while zeroing in on a PE investor. As per FinPac: “Brand image of a PE fund, experience and exposure of a PE firm in education and the related businesses, team credentials of a PE firm and their networking ability in the education business, valuation offered by a PE fund, nature of the funding instrument, whether the investment is happening via equity or convertible instruments, exit terms such as IPO terms and IRR obligations are some of the key things that need to be considered.”

Similarly, PE firms, too, carry out a well-heeled research regarding a franchise brand. Observes Aneja: “The brand should be nationally accepted and must have the right infrastructure to ensure that franchisees receive the right quality of product. Besides, a franchisor should also have a long-term plan with the brand.” While investing in a brand entails big ticket strategies, PE investors typically look at minority stakes between 15 and over 25 per cent, depending upon the business opportunity, promoter profile and risk appetite.

While seeking PE funds, a franchisor must take into account the time period that will be feasible for a brand and PE investor to reap maximum dividends. Suggests Jain: “As a part of the investment criterion, investors will evaluate the feasibility for a company to provide them exit in four to seven years either by way of Initial Public Offering (IPO) or trade sale.”

That's the way ahead

Even though the traditional funding modes rule the roost, it won't be an exaggeration to say that the future belongs to PE funding. This promising pie is not only capable of ensuring capital flow for the brands, but can also give new dimensions to the way a business is done.

PE funding can't be restricted only in aiding a franchisor monetarily. As a process, it is diverse and goes on to create an impact on the brand as well.

While seeking PE funds, a franchisor must take into account the time period that will be feasible for a brand and PE investor to reap maximum dividends.

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