Private equity players are gung-ho about recession-proof sectors such as education and healthcare, more so after the global economic crisis, but the question many of them are now asking is: Where are the deals? 

Data from VCCEdge, VCCircle’s financial research platform, reveals a mixed bag of investment trends in these two sectors in the first nine months of 2009. 

Across nine deals each in 2009, while PE investments in education jumped three times to $108 million in January-September 2009 against $35 million in the comparative period in 2008, healthcare suffered a steep fall. The first three quarters of 2009 saw healthcare deals worth $37 million compared to $269 million in the same period last year. 

Even in education, deal-making has been mostly in the low-hanging fruit category of test preparation and skills development as against the formal segment. The biggest investment was Navis Capital’s $30 million for a majority stake in ITM, a tertiary & executive education service provider. And, TutorVista Global, Career Point Infosystems Ltd and FIITJEE Ltd account for other investments in the same genre. 

On the face of it, these two sectors have everything going for them for a larger PE play.  Its non-cyclical nature, untapped potential and social dimension appeal have, in fact, stoked the appetite for even sector-focussed funds.

For instance, Milestone Religare is raising a Rs 600-crore fund. Spring Healthcare, with commitments of Rs 250 crore, will hike its fund size to Rs 400 crore. Kaizen Management Advisors, an education-focused fund which hit the road last month, looks at raising $150-200 million. CDC, a UK government investment agency and one of the largest investors in Indian PE funds, is reportedly looking to investing in funds specialising in education in India. (see table)

So, clearly, there is a lot of money available for the asking.  

But, the investible opportunities perhaps do not match up. PE players say, there are few scalable plays in the sector. “There is very little representation of the education sector in the capital markets,” says Praveen Chakravarty, COO & Head of Institutional Equities Sales at BNP Paribas India. 

One of the few listed companies is Educomp Solutions, which provides infrastructure services to education firms. The company, which investors consider a proxy for education in India, trades at a high valuation as it gets a ‘scarcity premium’. Educomp has traded at twice the valuation of Sensex at times, said Chakravarty.

The same holds true for healthcare. Though there are listed plays like Apollo Hospitals and Fortis Healthcare, the entry premium is high. “If someone wants to directly invest in healthcare including domestic LPs, it’s tough given the valuations,” says Ajay Nair, senior associate at Sabre Capital, which has opted for the roll-up model by setting up its own entity Spring Healthcare to build a portfolio of hospitals and diagnostic chains.

PE investing is all the more challenging in healthcare given the lack of structured ownership and management of doctors in India, said Aluri Srinivas Rao, MD of Morgan Stanley PE, at a recent VCCircle event. Besides, lack of accounting standards, inconsistent service quality and poor infrastructure are holding back investments in healthcare. 

Despite the challenges, it does not take away the fact that these two sectors offer unlimited potential. The $35-billion healthcare industry is projected to touch over $75 billion by 2012 and $150 billion by 2017, says Technopak Advisors. Education is an $80-billion market in India skewed in favour of the private sector ($50 billion).

Besides, there are some upsides on the policy front that could see a spurt in investments. One, the Foreign Educational Institutions (Regulation of Entry and Operations, Maintenance of Quality and Prevention of Commercialisation) Bill, expected to be tabled in the winter session, will allow 100% FDI in higher education. Two, classification of educational institutes and hospitals as infrastructure by the insurance and banking regulators has raised the antennae of domestic investors. 

“A lot of limited partners (LPs) are realising that there are very few markets expanding and moving in the right direction as rapidly as education in India,” says Sandeep Aneja, MD of Kaizen. For LPs looking to gain entry at relatively cheaper valuations in these sectors, PEs prove a good bet. And, this is reflective in fund-raising too.

“Sectoral themes are more appealing to LPs,” says Rajesh Singhal, managing partner at Milestone Religare, which has managed to raise Rs 300 crore so far.

Spring Healthcare has already got commitments of Rs 250 crore while Kaizen has managed commitments of $10 million. Aneja says, he expects around $40-50 million of commitments from domestic LPs while the rest $120-150 million will come from overseas investors. Aneja will hit the overseas circuit early next year.

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