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Despite the hype, investors are hesitant to fund core education

The education sector is sometimes touted as the next big opportunity for investors. You only have to look at the valuations of the few plays on education in the market to realize it’s a story that has been sold to investors. And not without reason. A recession-proof sector, an inefficient public education system, a growing young population and aspiring middle class besides the “education-hungry” Indian, are reckoned to be reasons for this rush of funds into education. A CLSA Asia-Pacific report last year said India’s education and training sector is a US$40 billion market, with a potential to grow at a compounded 16% a year for the next five years. Profit margins at the operational level range from 15 to 35 % across the sector.

It’s no wonder, therefore, that the India fact sheet prepared by most private equity (PE) firms points to education as a huge investment opportunity. A survey conducted among 90 fund managers in the private equity space by Chennai-based Venture Intelligence revealed that over 80% of them are looking to invest into education companies, which indicates a strong appetite for the industry.

To cite some recent deals, Mumbai-based Matrix Partners India invested Rs 100 crore in FIIT-JEE, an institution that trains students for IIT and All India engineering admission tests. Likewise, Career Launcher and Mahesh Tutorials have raised $10 to $12 million each a few months ago.

The moot question is: will this rush continue? Despite all the hype, only US $300 million has been invested in the sector since 2005. Also, PE money is finding its way only into all the support/ancillary services in education like coaching classes and test preparation, pre-school education, vocational training and books. And why not? Analysts expect Educomp’s bottomline to grow at a compounded annual growth rate of 50% over the next two years.

The problem is deals of any significance are yet to be inked into mainstream education like Kindergarten to 12th Grade (K-12) schools and higher education. 55% of the fund managers in the Venture Intelligence poll felt that regulatory hurdles make investing in education difficult. The dual regulatory structure (state and centre) is a stumbling block. Although fees in private schools are not regulated, a school/college has to be run by a trust, making it difficult for the investor to take dividends (returns) on investments or utilise surplus funds to scale up operations. Lending institutions, too, don’t have any incentives to support core education initiatives. Needless to say, shortage of trained faculty members and prohibitive real estate prices are constraints to growth of this sector.

At the same time, private colleges are flourishing. These remain non-profit entities and are characterized by a complete lack of transparency as well as, in many cases, making money by methods such as charging capitation fees. Further on the lending side, RBI is not clear whether loans for acquiring huge tracts of land needed by colleges are to be treated as “education” or “real estate”.

In short, although there’s a crying need to upgrade education, funding in this space, despite its ability to generate stable cash flows in the long run, may remain a dream as long the government’s current regulatory structure remains.

Source: Livemint

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