Education investment is the next big thing.
Worldwide, there is an upward trend in education investment and the sector is considered by many to be “core demand.” Based on population growth, favourable demographics, and the growing need for high quality education, the case for education investment is strong – it has retained its market demand even during the financial crisis.
This trend is expected to continue, and the market is ripe for more education investment. Education deals in MENA reached its peak last year at 17 deals, just behind Southeast Asia, and many Gulf Cooperation Council (GCC) countries are now actively seeking to diversify into non-oil sectors.
Hear from experts from EY-Parthenon in our webinar:
- Robert Lytle, Managing Director, Head of Education, EY-Parthenon, Ernst & Young LLP
- Jeremy Panacheril, Partner, EY-Parthenon Ernst & Young Middle East and North Africa (MENA)
- Amitabh Jhingan, Partner, EY-Parthenon Ernst & Young LLP, India
Q: More and more schools in the UAE are now charging monthly fees as competition grows and parents have more choice), so the "negative wc" is slipping away. Do you think this will be a challenge and, if so, how should players manage this change?
K12 providers particularly in the premium and super premium fee range have had to introduce fee related changes to deal with current new supply competing for enrollment - also impacting by the recent fee moratorium. Structural fee changes include (1) more frequent payments - in some case monthly (2) reduced fees - in the form of free “months”, (3) deeper discounts for early re-registration.
That said new schools always have fee structures which are different than more established providers - founder fee and sibling discounts, registration fee waivers, select corporate discounts, etc. This is to grow ramp-up as fast as possible and not specific to current market factors.
Parents don’t necessarily pay in advance for tuition - they provide post-dated Cheques in Dubai. Schools which are able to discount these with commercial banks at attractive rates can tap into a valuable source of working capital. But commercial banks are less willing to do this in the current banking environment so in my view schools will need to ensure that they have sufficient working capital to see them through the Opex and Maintenance CAPEX needs of each academic year and advance payments from parents is in many cases less the predominant source for this.
Q: How would you define the difference of education as infrastructure versus education as a service?
My suggestion is more about how to evaluate investment opportunities - if the facilities are great but the “service” related value is not or is too costly, then the equity value is impacted. This applies to M&A - where many investors look at both the overall cost of the Property as well as the cash flow resilience - and greenfield where many developers are delivering very costly campuses - in the end the value of the delivery of the optimal curriculum from a “service” point of view in my view is more important than the quality or value of the “infrastructure”. Examples of this for example are schools which have implemented iPad programs - this is costly. But how does it improve the “service” and I would suggest that investors looking at M&A, brownfield and greenfield should carefully look at infrastructure related costs more about its impact in service delivery than infrastructure value per se.
Q: Is there room for consolidating promising sub-scale players and create a holding structure to create the investment opportunity. for example Nurseries, Single/single digit footprint K-12 players?
Consolidation in select sub-segments of education is one of the key investment opportunities we highlighted in the presentation. And because increasingly there are opportunities to separate OpCo from PropCo value and because there are now investors who see yield returns for these two assets classes differently, there is potentially more opportunity to consolidate faster and create platforms. But as said on the webinar, Seller motivations are highly varied and that increases the time to close stand-alone transactions in MENA markets.
Q: How can we get the investor side of this equation sorted - global strategic players like Laureate vs PE groups with education theme vs MENA/GCC Family offices? Investor activity is very fragmented and tactical.
Agreed. As we said despite the obvious attractive demand drivers in MENA markets, this region still remains very small in terms of deal activity and investor interest when compared to other attractive growth markets. Global Ed players - both headquartered in the MENA region or not - will look at opportunities at a global level. They have reached that level of maturity and as a result, unlike MENA funds, are perhaps more able to look for value on a bigger stage. Very few if any regional PE funds have been able to show sizeable returns on Ed investments as yet, for several reasons - lack of available target, ramp-up risk, varied Seller priorities, high degree of fragmentation, etc. and because LPs in many of these funds restrict targets to the MENA region, origination is a real challenge. And PE firms need Management teams to already be mature. Successful family offices or regional family-owned diversified family businesses in my view have a different challenge - many have established returns thresholds rooted in businesses which have had “first” or “early” mover advantage in areas which current Ed investments cannot compete. If for example a family group has developed a successful business being the exclusive dealer for say Toyota...or established malls in fast growing catchments...etc...it is very hard to convince their Investment Committees to deploy capital in “traditional” education because the returns profile is very different. And stakeholders in some of these family groups look at education investments as social contribution more than financial returns - and while this is important - it can reduce the time to make a decision.
Q: How Fast is the Ed Tech evolving in the region & where would it rank when compared to some of the developed markets?
EdTech in the MENA region is in its absolute infancy even when compared to comparable “tech” verticals...fin tech, etc. Globally this is a very fast moving space, with a few winners and many more losers. But capital markets clearly place higher value on this segment and that creates opportunity for the few who could create value in MENA markets. For our markets “EdTech” is likely to require a hybrid of deployment models, both off- and online, and across multiple areas of education. Today people living in the MENA region already have access to global EdTech solutions...customizing solutions to the unique needs of segments of MENA markets is where the value for local investors is.
Q: One of the issues here in MENA is comprehension of value in direct delivery (outside K-12/HE) e.g. test Prep, License/professional training, Online Education. How do we improve comprehension of these opportunities?
As preferences and expectations change I think this will happen organically. The industry or government can’t necessarily change this as a group - preference will need to shift and investors need to be ready for that change.
Q: Do investors really look at VALUE K-12 - or is it wishful thinking that this segment will work?
As discussed on the webinar, investors want pre-packaged opportunities. If providers and start-ups feel there is a need for value based K12 and more broadly across education sub-segments, and can attract early stage funding to demonstrate this value, it could very well be that investors will deploy capital. But in my experience, very few financial investors are willing to take the risk of creating new models and often don’t know enough about education to be able to appropriately measure the risk/reward of new delivery models at early stage.