Education Delivers Highest Exit Multiples: IDG Study
Education sector, known for its recession-proof and non-cyclical business nature, may emerge as the favourite deal scouring ground for venture capital firms if the record of exit multiples is going to be a pointer. Education is still not that prolific in terms of deal volume but it has delivered the highest return multiples in its exits.
According to a recent study by IDG Ventures, education sector gave the highest return multiple of 7.4X in venture capital exits made during 2004-2009.
Out of the total 102 VC exits in the five-year period (2004-2009), IT services made the most number of exits at 22 with return multiple of 4.15X. This was followed by BPO/ KPO segment with 19 exits at an exit multiple of 4.1X. Though there were only five exits, education topped the list with 7.2X return. Biotech firms remain at the end of the ladder with 2 exits at 1.1X return multiple.
Education, which witnessed deals worth $300 million in 2004-2009, has a potential for $2-billion investment in the next five years in India. “Nearly 81% of PE investors in India want to invest in education but only $300 million has been invested so far. Currently, PEs can only participate indirectly due to ownership restrictions for schools and higher education institutions. The government must lift key regulatory hurdles to spur PE investment,” the study said.
According to VCCEdge data, since 2000, 57 PE/VC deals worth $512 million took place in the education sector. Till date in 2010, about six deals worth $118 million have been inked. In 2009, 10 deals worth $128 million were struck in education. The biggest deal in terms of value was Premjiinvest’s $43-million investment in Manipal Universal Learning. Last month, Reliance Equity Advisors (India) Ltd, the private equity arm of Reliance Capital Ltd, invested Rs 100 crore in Pathways World School.
As per the exit valuation, education sector stands at the top with an average of $367 million, which is ahead of financial services with an average exit valuation of $318.2 million. Though software sector leads with the higher number of exits and higher exit multiples, it could make an exit valuation of an average of $28.8 million, which is the lowest across sectors. BPO/KPO ($229 million), engineering ($192 million) and retail ($190 million) also lead the average exit valuations. In top exits by sector, by value, IT services stands first with exits such as Mindtree Consulting IPO ($360 million), followed by BPO (Firstsource IPO-$605 million), software (Excelsoft acquisition by DE Shaw-$88 million), internet (Naukri IPO-$310 million), mobile VAS (Onmobile IPO-$450 million) and education (Educomp IPO-$250 million).
During 2004-2009, there were about 114 VC exits of which 62 were M&A deals, 15 IPO and 36 secondary sale/buybacks. There is an average exit multiple of 4.63X and an average IRR of 40.15%. The year 2007 witnessed maximum number of VC exits at 33 with an average multiple of 5.9X. And, 2008 saw the lowest number at eight exits with highest return multiple of 21X. In 2009, 13 exits were made at an average of 2.8X.
During 2004-2009, 60 exits were made through strategic sale (2.8X), 22 through secondary sale (9.4X), 16 through buyback (2.7X) and 15 through IPO (4.2X). And, 70% exits generated under 4X returns. About 28 exits were made at below 2X returns, 19 were below 2-4X range, 10 were in the 4-6X range. About 2-3 each exits were made in 6-8X, 8-10x, 10-16X and above 16X return multiples. As per valuation distribution, 38% of exits were made at above $80 million valuation. About 17 exits were made in the $100-500 million range while about six exits were in the above $500-million range. About 39 companies were acquired by domestic corporates (2.4X), 37 companies were bought by foreign corporates (5.8X) and PE/VC firms acquired about 15 companies (7X).