Private players bet on education for big returns

• In March this year, private equity fund Sequoia Capital India invested Rs 25 crore in the Hyderabad-based K12 Techno Services which offers a range of services to schools. Earlier, in July last year, Sequoia, along with the Hyderabad-based SONG Investment Advisors, had pumped Rs 75 crore into the same company.
• Again in March, HDFC invested an undisclosed amount in Kaizen Private Equity, the country's first education-focused PE fund. In February, HDFC put another large, undisclosed amount into Career Launcher, which runs the Indus World School chain.
• Also in February, Tree House, which runs a chain of nursery schools in Mumbai, filed IPO prospectus with SEBI to raise Rs 150 crore.
• In January, publishing giant Pearson bought 59 per cent in TutorVista, which runs online coaching classes. Earlier, TutorVista was funded by Sequoia Capital, US-based VC firm Lightspeed Venture and private education heavyweight, the Manipal Group.

There's money in teaching. This simple fact, long known to tuition teachers, proprietors of coaching classes, trusts that run private schools, and politicians who have set up private colleges, has finally dawned on the corporate world. All kinds of private players, led by venture capital, or VC, firms and private equity, or PE, funds are making a beeline for this sector.

"We are interested in the business of education. We want to replicate what we did in housing by looking at quality education at a comfortable price," says Renu Sud Karnad, Managing Director of Housing Development Finance Corporation, or HDFC. Explaining why it made sense for investors to look at this space, she says, "If you structure it in the right manner then it is possible to make a decent return. Not profiteering. Yet, also ensuring that the shareholder value is not reduced."

Over 140m Children in govt-run primary schools 60-70m Children in private primary schools 142m Children who still do not go to school

Stimulating corporate India's interest is also its belated discovery that unlike most sectors, education is recession-proof. "We have invested in health care and education and find both sectors recession-proof," says Vishal Vasishth, Managing Director, SONG Investment Advisors India. "Both these are underserved segments and there are big opportunities if one can get the pricing right."

The size of India's private education sector, including the coaching classes segment, is estimated at around $40 billion or Rs 1.84 trillion (1 trillion equals 100,000 crore) already, with school education - the kindergarten to Class 12, or K12, segment - comprising half the amount, and higher education, including vocational education, the other half. It is now set to grow even bigger with the entry of corporate funding. Flush with money, the recipients are thinking big - planning not one or two new schools, but big chains with corporate-style management.

Career Launcher, which runs 14 schools in as many locations, is ambitious. "We want to grow into a 100-plus set-up," says R. Satya Narayanan, its Chairman. "This translates into a lot of front-loading of investments, so that we in turn can invest in research and development, technology, curriculum building, training and processes."

10-15m Children in govt-run secondary schools 25-30m Children in private secondary schools 6m College students (most colleges are private) 1m Students in private vocational institutes Over 75,000 Total no. of private schools

The ambition resonates elsewhere M. Venkatanarayana, Chairman, K12 Techno Services, aims to have 80 schools by the yearend, all of them in Andhra Pradesh. "By 2015, we are eyeing 500 schools across nine states. We shall start with the neighbouring states of Chhattisgarh and Orissa next year." K12 engages in teacher recruitment and training, developing course content, designing and implementing enterprise resource planning, marketing and admissions.

Venkatanarayana's focus on Andhra Pradesh is with a good reason - the state seems to be ahead on the maturity curve in education. "It is a typical example where the school and college tuition market has consolidated to just three or four major players, each having over 50 schools," says K.P. Balaraj, Managing Director, WestBridge Capital Partners. It is more fragmented in other markets with players having not more than 10 schools each.

The main stumbling block that held back private companies from investing in schools all these years was the stipulation that private schools must be run by not-for-profit trusts only. Also, some states do not allow educational institutions to transfer surpluses from one institution to another. As a result, corporates entering the space started the business as part of corporate social responsibility, or CSR, activities. Now, some are beginning to find another way. The rule about not-for-profit does not apply to service providers - companies like K12 Techno. Not surprisingly, then, as V. Ravishankar, Managing Director, Sequoia Capital India, notes, "There is increasing interest in the services model."

Rs 1.8trn India's education and training market Rs 92,000cr The Kindergarten to Class 12 segment Rs 32,000cr The private professional college market Rs 23,000cr The coaching classes, private tuitions market Source: CLSA India Education Sector Outlook, 2008 and Industry

Apart from K12 Techno, another big success in the services space is Educomp Solutions. Begun in 1994, it has, since 2008, been offering trusts that run schools total endto-end services. It currently has a network of around 50 schools, and has set a target of 150 by 2015. Educomp also provides IT solutions to schools, where it claims to be the biggest player, reaching out to 26,000 schools and 15 million learners and educators globally.

Yet another similar, successful endeavour is the Essel Group's Zee Learn, which acts as a consultant to local entrepreneurs who wish to setup schools under its brand name Kidzee and Mount Litera and provides education management and advisory services.

Kidzee is India's No. 1 pre-school chain with more than 700 branches in 300 cities while Mount Litera has 65 K12 schools across 48 towns under its tutelage.

"Traditionally, services used to be coaching classes, tutorials or providing technology such as smartboards," says Ramya Venkataraman, leader of consulting firm McKinsey's education practice in India. "It is now wider and includes school management, infrastructure and teacher training." When a service provider runs a chain of schools, the organisational structure is often different from that of the traditional ones. "Elements of new business models would include structures and processes that allow for rapid scale-up," says Venkataraman. This, she says, could include creating a 'hub' school providing inputs to schools around it, standardising teaching and learning methods, and integrated services play within K12 segment.

The profile of people getting into school education is also changing. High fliers from the corporate world are choosing to opt out and set up schools. Consider Nooraine Fazal, a post graduate in management from Boston University who spent years working with IBM and Reuters. Fazal set up Inventure Academy in Bangalore in 2005, of which she is managing trustee and CEO. Her trust is a joint venture with Bangalore developer Prestige Group, and her board of advisors includes Mahesh Vyas, Managing Director and CEO, Centre for Monitoring Indian Economy, among other well-known people. Though still dependent on the Prestige Group for funds, she says: "Our goal was to become financially independent in seven years, and we intend to meet it."

Fazal, who is in the process of setting up two more - another in Bangalore and one in Coimbatore - knows that profits lie in services. She is starting a management company that will be scalable and provide curriculum, lesson plans, teaching methodology and institution design processes to schools.

The eligibility criterion for setting up private schools is not the only barrier to private sector investment in school education. The Right to Education Act, which was passed last year has emerged as a fresh threat. Several provisions of the Act have been challenged - there are currently 20 petitions pending in the Supreme Court - but the one that has caused most disquiet relates to the provision for compulsorily reserving 25 per cent seats in all schools for economically weaker sections. The Act says the state government will reimburse the tuition cost of these children - from whom the schools cannot charge fees - but in practice, educationists fear, the government will never pay up (See "Most Private Colleges are Real Estate Rackets"). The apex court has asked all states, schools and other stakeholders to share their views on the constitutional validity of the 25 per cent reservation before it announces its decision. "Future expansions will depend on the court order and what sort of notifications relating to school education the states pass," says Fazal. She worries there may be greater regulation in future, including a cap on fees that could make setting up and running quality schools unviable.

The uncertainty is holding back new investors. "There are a lot of regulatory risks in the education space that need to be watched. Much depends on the emerging product mix," says Subir Nag, Head, Mezzanine Fund at ICICI Venture. He, however, feels that several factors together have led to the investor interest in this space. "First, the high profile Human Resource Development Minister Kapil Sibal, who has spoken of the need for changes in the system, has generated interest," he says. "Again, with the growing presence of expats and foreign-returned professionals in India, the world school concept is likely to have takers.

And finally, the India growth story." School and higher education in India are polar opposites in several respects. While majority of schools are government run, private bodies run around 80 per cent of higher education institutions. Many private players, funded by corporates, have entrenched themselves in this space such as the Manipal University, Amity University and the Indian Institute of Planning and Management. Regulatory worries among higher education providers are also somewhat different - they relate to recent proposals by the All India Council for Technical Education or the University Grants Commission which seem to them an attempt to micromanage in matters of curriculum and fee structure, even as fly-by-night operators, bent on subverting the system, get away unregulated.

But higher education in India is also expecting a fresh infusion of capital from an entirely new source - overseas. The Foreign Institutions Bill, already cleared by a Cabinet committee, but still to be introduced in Parliament, is widely expected to get legislative assent this year. This will open the doors to foreign universities seeking to set up base in India. At present, foreign universities cannot offer degree courses in India. They can only do so jointly with Indian universities.

"I expect infrastructure players to add higher education as another vertical in the next five years," says WestBridge Capital's Balaraj. One leading infrastructure group has already made a beginning. In April last year, the GMR Group and the Schulich School of Business in Ontario, Canada, tied up to develop a campus in Hyderabad - Schulich will handle the academic operations while GMR will develop the campus. A host of other interested universities, mostly from the United States, Britain and Australia, are waiting anxiously for the Bill to be passed.

For children and parents, still, it is the quality and reputation of institutions that matter most. Which is why every city has its handful of iconic schools, and there is such a mad rush for admissions into those few schools every academic year. "Parents look for reputation, overall results, consistency in performance and, of course, value for money," says Gita Karan, founder of Gitanjali School in Hyderabad. The message is clear: no matter what the input sources or resources are, it is the output that matters.

Puli Kishore Kumar, Managing Director, Trident Microfin Microfinance helps build schools The bulk of our microfinance clients are people from below the poverty line. Yet 95 per cent of them send their children to private schools," says Puli Kishore Kumar, Managing Director of Hyderabad-headquartered Trident Microfin. "We sensed a business opportunity in offering loans to local private promoters for setting up schools for these children." Kumar evolved a business model and by 2009 began giving loans to build schools. The loan amount is usually around `3 lakh, but on occasions has gone up to `10 lakh, and has to be returned in five years. The criterion: the schools planned must be affordable with fees not more than `400 a month. "We targeted those who find it difficult to access formal credit," he says. So far, Trident has financed 16 schools.