Indians' obsession with schooling combined with woeful public education and rising incomes has private equity firms on the hunt for scarce opportunities in the country's booming but fragmented for-profit education sector.
Deals tend to be small in the highly regulated industry. The Indian education sector saw 11 private equity investments worth a combined $130 million in the first four months of 2011, putting it on track to surpass last year's $261 million raised from 25 deals, according to a report by Kaizen Private Equity.
Recent deals include a 1 billion rupee ($22 million)investment in staffing and vocational training firm Teamlease by Indian funds Gaja Capital and ICICI Ventures, the $2 billion private equity arm of No. 2 lender ICICI Bank.
New Silk Route, which runs a $1.3 billion fund focused on the Asian consumer sector, has made one investment in Indian education and is hoping to close its next investment in the vocational or test prep segment in the coming six months, said partner Jacob Kurian.
"We are actively interested because the opportunity is huge but the way the sector is structured now, it is more suited to venture or smaller private equity deals than bigger funds like ours," said Kurian, whose fund has a minimum deal size of $40 million. "So given the size and scale of companies, bigger deals are limited," he said.
The attraction is a roughly $85 billion education sector, more than half of which is funded privately in a country where state schooling is often so bad that most families who can afford it send their children to private school.
While just 7 per cent of India's primary and secondary schools are private, they attract 40 percent of pupils, according to CLSA. Parents are happy to spend their savings to create opportunities for the children who will support them in their old age.
"India's educational infrastructure and services are insufficient. They lack the quality needed to train and build a workforce which is required to keep pace with its growth," said Sandeep Aneja, managing director of Mumbai-based Kaizen.
"The private sector will fill in this gap and drive the change and this is what makes it very attractive," said Aneja, whose firm runs a $100 million education fund and plans to close its second investment in the next two months.Few companies with scalable businesses has kept a lid on private equity in education and means valuations can be high -- a common complaint in an $8 billion Indian private equity sector where cash-heavy funds chase scarce opportunities.
"Increasingly the education sector is acquiring the status of being a hot sector and because of that a lot of education entrepreneurs are beginning to have unrealistic valuation expectations," New Silk Route's Kurian said.
Recent deals include a $44 million investment in Manipal Universal Learning by Catamaran Ventures, headed by Infosys co-founder N.R. Narayana Murthy.
Manipal Universal, a vocational and distance learning company, plans an initial public offering this year, one of several potential private equity exits in the pipeline.
The sector's biggest exit saw British publisher Pearson pay $127 million for 59 per cent of Indian online tutoring firm TutorVista from three investors including U.S. venture capital firms Sequoia Capital and Lightspeed Ventures.
Other firms considering IPOs include Tree House Education, which manages pre-schools and is 36 percent-owned by U.S.-based Matrix Partners, and Gaja-backed test prep firm Career Launcher.
Most education spending in India is on the regulated core segment of schools and colleges, which are mainly non-profit, so investors focus on the "parallel" education segment including software, pre-schools, computer schools, vocational training, and coaching centers.
"As most of the schools and colleges are run under trusts which have to be non-profit, regulation remains the foremost hurdle for funds looking at this space," said Arvind Mathur, chairman, of consultancy firm Private Equity Pro Partners.
China and South Korea, where parents also spend heavily on education, have also attracted private equity investment.
Education beyond the standard curriculum is highly sought after in India where even graduates of prestigious schools sometimes need months of training to meet employers' needs.
The government, which sees improving education as crucial to maintaining growth and addressing the skills gap, is encouraging public-private partnerships.
Its National Skill Development Corp recently formed a $34 million tie-up with Everonn Education, whose investors included U.S. private equity giant Blackstone, to train 15 million students.
"We are betting high on the strength of the consumption story in India and education will be a focus sector but investments will depend on scalability of the model and regulatory issues," said Vishakha Mulye, chief executive and managing director at ICICI Ventures.