With more money in their pockets, Asia’s aspiring middle classes are driving up demand for better schooling of their children.
From an investment point of view, though, the education sector faces some rather unique challenges, which are making for – and look set to continue making for – a rather bumpy ride.
According to alternative data specialist Preqin, venture capital deals targeting the education sector in the Asia-Pacific region grew by 16% to 523 transactions from 2017 to 2018, while the deal value jumped to $5.77 billion from just $2.31 billion.
It’s since come off in 2019 with only 220 deals recorded in just over seven months, with an aggregate value of $1.68 billion.
Whether this latest slowdown is due to the ban announced in November prohibiting private kindergartens in China from selling shares on a stock exchange or not is a moot point.
But it’s clearly shut off one possible exit route for interested investors.
And for asset owners it shines a brighter light on the potential pitfalls up ahead due to the education sector’s high social importance to many governments.
As Steven Tran, Hong Kong-based partner at US law firm Mayer Brown, puts it: “We will continue to see the potential regulatory hurdles as being one of the key challenges to doing deals in the education sector in Asia.”
However, with one estimate last year – before the Chinese ban on kindergarten IPOs was announced – estimating the private education market in Asia at some $370 billion, it’s going to take a lot more to reverse the flow.
Other recent examples of investments include a $10 million deal in July forged by Singapore- and India-based education manager, Kaizen Private Equity, with Yola, a Vietnam-based English learning services provider.
Tran, who represents clients on private equity, cross-border M&A and joint venture transactions, said Vietnam and Singapore were fast emerging as education frontrunners.
“From an LP [limited partner]’s perspective … we are seeing a healthy portion of their money being allocated towards funds that have an education focus,” Tran told AsianInvestor.
He said Vietnam in particular was attracting capital from regional and global funds and that Singapore is forging ahead with education technology.
In August last year, Vietnam rolled out a new decree in a bid to attract more foreign investment in the private education sector, relaxing the number of Vietnamese students who can be enrolled in foreign-owned schools.
India is another place of interest. Hong Kong-based Nord Anglia – privatised by Canada Pension Plan Investment Board and Baring Private Equity Asia in April 2017 for $4.3 billion – acquired five Oakbridge schools in India this February in a deal reportedly worth $200 million.
At a time when the global economy is slowing down and asset valuations have become stretched, education is also attracting attention as a potential contra-cyclical play.
“It’s a very resilient sector, even during economic downturns,” said Conrad Tsang, founder of Hong Kong-based multi-family office Strategic Year Holdings. “Households will not be likely to cut down a lot of the education spending on their children.”
It can also be a rather lucrative sector.
“To execute our strategies, which take five to seven years, we are comfortable that we can achieve a double-digit internal rate of return on a consistent basis from earnings growth and M&A opportunities,” Tsang said.
Strategic Year currently allocates about two-thirds of its private equity allocation to education-related companies across Asia.
“I will maintain it like that because we like the sector,” Tsang added.
IT'S EDUCATION, STUPID
Nonetheless, education remains a sector that has to be handled with care, not least in more conservative parts of the Asia-Pacific region with less of a democratic tradition, including China.
For example, China’s negative list, which determines the amount of foreign investor participation allowed in more sensitive areas of the economy, includes a paragraph on education. Among the stipulations covering institutions from pre-school to higher education are that the head teacher should be Chinese and that no less than 50% of board members should be Chinese nationals.
“The lessons children are taught in school will most likely remain with them for life and shape their thinking and behaviour, so governments understandably want to make sure they are controlling the type of information that children are exposed to, and they do that through enhanced regulations,” Tran said. “It will continue to be a hurdle that I don’t think will diminish over time.”
The fallout can be expensive if investors misread the local regulatory landscape.
Take November’s kindergarten IPO ban. For Chinese education companies already listed, it’s given rise to concerns that they may yet have to divest their pre-school operations or delist altogether. Hong Kong-listed China Maple Leaf Educational System’s and New York-listed RYB Education’s share prices, for example, are still down 48% and 64%, respectively, from that date.
Tsang said Beijing’s move caught people by surprise because at the time a lot of operators were investing heavily into high-end kindergartens. “A lot of projects were put on hold,” he added, “and some of the operators were encouraged to turn their operation non-profit.”
Of course, education is typically provided for the good of all society. This is true of all countries and regions and true for profit-seeking education providers as well for the public education sector.
So regulation is a challenge for private equity investments in education globally, not just in Asia, Tsang said.
As a result, he said, education companies should always strive to build sustainable businesses, avoid short-term profit opportunities, and communicate constantly with local regulatory bodies to maintain trust, uphold standards and sustain the sector's healthy development.