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Quality education: Private equity firms target secondary schools

February 16, 2018
Private equity firms are expanding their investments in secondary school education in Nigeria and across Africa to meet the rising demand for quality education by the country's expanding middle-class parents.

The sharp depreciation in the Naira, which has led to a significant rise in the cost of educating children abroad, and the deplorable state of public funded educational institutions, have increased the demand by middle-class parents for educational institutions that are located in the country but can provide international standard educational environment, facilities and teachers.

Private equity firms have recognised this need and are beginning to invest in secondary school education in the country.

Nigeria-based private equity firm, Verod Capital Management, through its educational investment vehicle, Oreon Education, in July 2017 acquired a stake in Greensprings School, one of Nigeria's leading private secondary schools located in Anthony and Lekki, both in Lagos, bringing the number of its investment in private secondary schools to five.

Verod disclosed that the investment was designed to enable Greensprings restructure its capital base and fund growth initiatives.

"Greensprings has a long track record of academic excellence and is led by an experienced CEO and management team” Eric Idlahi, partner at Verod, said in statement announcing the deal. "We believe in the company's growth potential and are thrilled about its expansion plans both in the traditional education space and in ancillary services – supplementary education and teacher training."

The private equity firm said it expects that the segment will continue to grow owing to increasing affordability for the middle class and the Nigerian government's increasing role as a steward and enabler rather than a provider of public education.

Other private secondary schools have told Business Day that they are also actively seeking investments from private equity firms.

"We are currently in the process of getting our house ready to approach international private equity investors. It is indeed the right way to go, but to do this, you must be mature as an institution, since this gives you an identity,” Bunmi Egbeyemi, founder of Tender Loving School, Ikoyi, Lagos, said. “I do know of proprietors who have such international private equity backing and tend to be making the most of it."

Funding education is capital intensive and profits are often not expected in the first decade of an educational institutions existence, making it necessary to explore novel models of funding such as long-term private equity investment. Industry players say the average wage bill of a medium-sized private university is about N500 million per annum.

Setting up a well-equipped electronic engineering department costs about N80 million and profit is strictly a game of numbers. It takes at least a decade to have the number of students needed to break even, according to industry players.

"A lot goes into building and running a school beyond putting up classrooms. Education investing is definitely more profitable at the secondary school level than at the university level. I do know that some secondary schools are profitable, but the same is not true for most universities, even those that were set-up to make money” Chidi Nwagu, manager, University Development at the Pan-Atlantic University, Epe, Lagos, said in a phone interview.

But analysts note that Private equity firms can reap internal rates of return of between 25 and 30 percent if they can ride a long-term investment of up to 12 years.

Increasing and a largely young population means that the demand for education is growing in Nigeria and across the African continent. The median age for the Nigerian population is put at 17.9 years, one of the lowest globally, while that of Africa is about 19.5 years.

Quality education rank high in hierarchy of needs of African middle class families earning $5,000 per annum.

A 2016 McKinsey report notes that by 2020, 128 million African households will earn $5,000 a year or more, enabling them to spend half their income on non-food items. Besides, the report notes that Africa's middle class families - those earning $20,000 or more outnumber India 's making the African market quite attractive for investment in education, especially as government funding for education is abysmally low.

Nigeria's average annual budgetary allocation to education in the last four years was N472 billion, out of an average annual budget of N5.05 trillion, which represents an average of 9.36 percent, resulting in a funding gap of 16.64 percent, representing N840 billion annually, according to the United Nations Educational, Scientific and Cultural Organisation (UNESCO) benchmark of 26 percent of national budget This represents a funding gap opportunity that private equity fund could fill.

However, the funding challenge for education is not uniquely Nigerian. Across Africa, a new education funding model has emerged in Angola, Ghana, and South Africa involving private equity firms to help narrow the funding gap, improve accountability and increase transparency in resource allocation.

Africa-focused fund Development Partners International is working on two opportunities in the educational sector, partner Eduardo Gutierrez told Reuters in recent report. Also emerging markets firm Actis, which has made investments in Chinese and Brazilian education companies, has its eye on investing in education on the continent according to a Reuters report.

Curro parent, Curro Holdings (COHJ.J), majority-owned by the private equity arm of South African investment group PSG,is also one of the few examples of a private equity-backed education group in Africa. ADvTECH Group (ADHJ.J) is the only other South African listed education company.

"Investment in education sector can become highly profitable in the long run,” PSG chief executive Piet Mouton is quoted by Reuters as saying. The value of its 2009 investment in Curro had already increased five-fold. Curro Holdings share price has nearly quadrupled since listing and its now sees huge potential in investing in education with plans to have 80 schools by 2020 from 26 currently.

“It could take anywhere from seven to 12 years for a new school to fill up and make money, but when full it should generate core profit margins of up to 40 percent.”

AfricInvest, a $1 billion asset, mid-market private equity firm, backed International Community School, a private school in Ghana, in a preferential share deal in 2017. The investment is the sixth for AfricInvest’s third private equity fund, which was 50 percent deployed at the time. The capital will be used to upgrade the school’s facilities and help support its expansion plans within Ghana, as well as the broader West African region.

Similarly, ABO Capital, an Angolan investment firm, has acquired Complexo Escolar Privado lnternacional in Luanda, Angola's capital city, reinforcing the evolving trend. Terms of the deal for the 768-pupil facility remain undisclosed. Also known as the Turkish School, CEPI started life in 2007 and enrolment has expanded consistently, reaching 768 pupils in the current academic year.

Private sector backed for profit institutions are common in other emerging markets. Brazil is said to be home to some of the world's largest publicly-traded education companies, partly owned by private equity firms. These include Anhanguera Educacional and Estacio Participacoes.

In India, $1 billion of private equity has gone into education in the last four years, Sandeep Aneja, managing director of Kaizen Private Equity, told Reuters. Kaizen, which is a private equity firm focused on investing in education is already planning to expand into Africa.

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