PE investors in education must take calculated risks in ASEAN: Arnaud Delamare, Roland Berger

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The economic and population growth in Southeast Asia has spurred the growth of private education, as parents aspire for their children to attain an even better standard of living. As such, this has positioned education ti be viewed as essential for social mobility.

While wealthy families usually sent children to best education providers abroad, they are increasingly relying on local or regional brands.  These institutions – such as Montessori and language learning centres – offer Western standards of education, innovative approaches to education or integral components to the standard curriculum.

As a result, over the past five to ten years, private sector education has become quite sophisticated in the region. It generated an estimated $90 billion to $110 billion in 2016 in revenues, while the overall education sector is expected to grow 5-6 per cent p.a., till 2020. Transactions over the past few years indicated that investors approached favourable deals through distinct investment strategies.

First, investors and private equity firms bought and centred resources in one country.  For instance, Ekuinas acquired institutions in most education segments in Malaysia, since 2011 and built them into strong brands, such as Tenby schools and Asia Pacific University. Secondly, they grew a niche franchise. For example, Advent acquired The Learning Lab, a Singapore-based tuition centre, and grew its locations.

Third, investors used global brands to expand in the region.  As an example, in 2008, Baring Private Equity acquired Nord Anglia, an international operator of premium schools and farmed locations across the world.

While this looks to be quite an appealing sector for investment, the reality is that the success stories are centred in Malaysia and Singapore – now somewhat saturated – and seem hard to replicate in other markets across the region.

This is due to several factors.  There is much heterogeneity, including language; diversity of curriculum and national exams expectations (and hence, student rankings); and perceived quality gaps of national education systems.  Additionally, regulatory hurdles on investment, especially in Indonesia, and high market fragmentation limit the opportunities to invest. These factors have dampened investment into the education sector beyond Malaysia and Singapore.

While there are options for keen investors, it will be difficult to replicate successes by only applying past investment criteria.  Some niches remain ripe for investment since they are only mildly affected by limitations and regulations.

Tutoring and after-school activities pose limited competition, if at all, with existing public systems.  Since tuition usually complements traditional education, growth in this segment could be buoyed by eager tiger parents.

Institutions offering certifications in vocational skills may garner more demand and could be viewed as an investment opportunity.  This is spurred by moves toward services-based economies and ever increasing globalisation.

Language institutions could be an investment target as well.  Tiger parents may push their children to learn a third or fourth language – beyond mother tongue and English languages – since major corporations covet multilingual senior executives.  Language skills also serve as a social lubricant for upward mobility.

Emerging e-learning technologies (e.g. peer-to-peer learning) will reinforce the growth potential of these three niches, with increased scalability and reduced capital needs, compared to traditional brick-and-mortar models.

For ambitious investors with existing assets in Singapore and Malaysia, market entries into other SEA markets should leverage core assets and activities, as diversification upon entry might prove challenging to execute. Investors without existing assets should seek to grow a niche franchise in Indonesia, Vietnam, the Philippines or Thailand.

For ambitious investors with existing assets in Singapore and Malaysia, market entries into other SEA markets should leverage core assets and activities, as diversification upon entry might prove challenging to execute. Investors without existing assets should seek to grow a niche franchise in Indonesia, Vietnam, the Philippines or Thailand.

Sourcing and assessment of pilot investments will be crucial, as well as the execution of a solid organic growth plan.  Expansions to new markets should be considered mid- to long-term upsides, potentially relevant for following exit strategies. With further liberalisation, integration and consolidation of the Southeast Asian education market likely to happen, investors should identify opportunities and focus on tangible value creation levers on these niches.

With more and more tiger parents seeking opportunities to upskill their children, education niches will no doubt edge closer to mainstream.

Arnaud Delamare leads investor support and private equity practice for Southeast Asia at Roland Berger, a global strategy consulting firm. All views expressed in this piece are not representative of DEALSTREETASIA.

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