IDFC Alternatives strikes 3rd deal with Manipal Group, puts $18M in Manipal Servicecorp

In a first-of-its-kind deal, IDFC Private Equity Fund III has invested Rs 100 crore ($18 million) for a significant minority stake in Manipal Servicecorp Facility Management Pvt Ltd, which will build and manage student accommodations/hostels across the country. The private equity fund of IDFC Alternatives will have the option to invest another Rs 50 crore ($9 million) by end of 2013 in the company, promoted by the Manipal Education & Medical Group.

“We are excited about this investment as it allows us to play on the education theme, a sector we have liked for a long time. By actively investing in a derivative of the sector, it leaves us less exposed to the cyclical risk as compared to investing in a school or a college,” said Raja Parthasarathy, partner at IDFC Alternatives.

This is IDFC Alternatives’ third investment into the group; it has been the first institutional investor in group companies Manipal Universal Learning and Manipal Health Systems. These firms had also raised funding from NR Narayana Murthy’s Catamaran Ventures, PremjiInvest, India Value Fund Advisors and Kotak Private Equity.

“We want to partner with promoters who have the reputation for trust and business excellence. Manipal has been an excellent partner and we had a discussion with them on where else we could invest in their portfolio,” said Parthasarathy who, along with IDFC Alternatives’ director Prasad Gadkari, will join the board of Manipal Servicecorp.

Expansion plans

Manipal Servicecorp currently manages about 12 million sq. ft. of space across more than 70 sites and provides catering services to at least 13,000 people a day. It has three greenfield projects under development which will be completed by the middle of next year. These are coming up at Manipal University (Jaipur), TA Pai Management Institute (Manipal) and Manipal Global Education Services’ banking training unit (Bangalore).

Manipal Servicecorp currently generates all its revenues from managing, catering and security management services but going ahead, this will account for the smaller stream of revenues, according to Parthasarathy. In the future, though, most of its revenues will come from student accommodation fees (as it builds out hostels). As of now, the firm has a run rate of Rs 130-140 crore and is profitable, he said.

With completion of these ‘model’ projects, Manipal Servicecorp will foray into third-party services for other universities. The company is targeting 20,000 tenants in the next 4-5 years.

In the US and the UK, student accommodation has become a billion-dollar-plus business as universities focus more on academic infrastructure like auditoriums and labs, instead of hostels. Companies like American Campus Communities, listed on the NYSE with market cap of $4.66 billion, and UK’s Unite Group plc, a London-listed firm with £415 million market cap, are some of the largest players in the overseas market.

According to Parthasarathy, although this industry is young, demand for third-party services will increase as universities see more value in investing into academic infrastructure. Moreover, current off-campus accommodations are mediocre and students are also willing to pay extra for added comforts like internet and cable, gyms and convenience stores, he noted.

Overcoming ‘regulatory ambiguity’

The education space has witnessed a record number of deals in 2012, even though the deal value is currently trailing that of 2011. In 2012, there have been 28 deals worth $127 million in education services space till date, compared to 27 deals worth $172 million in 2011, according to VCCEdge, the data research platform of VCCircle.

This is the second investment of IDFC Alternatives in the education space although it has been actively looking at the sector since its first investment in Manipal Global Education in 2006.

“In education, we have evaluated over 30 opportunities over the past three years alone. But we have always been concerned about the regulatory ambiguity that education is perceived to be a sector which should not be run for profit. This business is a great way to bet on the sector’s growth while avoiding that risk,” said Parthasarathy. Although several funds have invested in schools and universities with dual structures, these assets have never really been tested in a public market exit, he noted.

The investment into Manipal Servicecorp is in tune with IDFC Alternatives’ private equity group’s strategy of investing in opportunities at the intersection of consumer and infrastructure sectors. This year, IDFC Private Equity Fund III invested Rs 150 crore in post-harvest management solutions provider Staragri, followed by Rs 155 crore into the dairy products firm Parag Milk Foods.

(Edited by Sanghamitra Mandal)

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