PE-backed education startups deploy “roll-up” strategy to win in lucrative Vietnam market

Vietnam’s homegrown education companies, backed by private equity firms, are adopting the “buy-and-build” model to scale up operations and expand their footprint in a rather fragmented market.

The PE-backed roll-up strategy, involving mergers or acquisitions of several smaller companies in the same sector, is expected to further gain momentum with a handful of players drawing up plans for a bigger play.

The ball was set rolling by PE-backed overseas firms that gobbled up kindergarten to Class 12 (K-12) assets across Vietnam, eyeing a platform play. In the first such deal, KKR-backed British education group Cognita acquired the International School of Ho Chi Minh City and Saigon Pearl Primary School in 2014.

In 2015, CPPIB and Baring PE-backed, London-headquartered Nord Anglia Education bought British International Schools Group which has campuses in Ho Chi Minh City and Hanoi.

Four years later, Warburg Pincus and TA Associates-backed UK schools group Inspired acquired Australian International School and European International School in Ho Chi Minh City.

While Vietnam is still at a nascent stage in terms of rolling-up opportunities, ultimately this will become an inevitable pathway for education services providers, according to Raj Shastri, partner at education-focused PE firm Kaizenvest, an investor in YOLA, an enrichment chain with 17 centres in Ho Chi Minh City.

“If you look at markets like China or India, there have been roll-ups in kindergarten and K-12 segments. It is a nature of the market that it will ultimately consolidate through roll-ups,” he added.

What began as an overseas PE play has now shifted to the local market with PE-backed operators such as BHL Education, EQuest, and Nguyen Hoang Group expanding via M&As.

In the last decade, Vietnam has seen nearly 100 private K-12 schools and over 450 language training centre operators mushrooming in Hanoi and Ho Chi Minh City, according to state data. The trend has been driven largely by macroeconomic factors and higher consumer spend directed towards quality education.

Since Singapore-based Heritas Capital’s investment in 2019, K-12 schools operator BHL Education has grown its network from a single school to 50 campuses. In the process, it acquired three different chains — Tue Duc, Inspired Schools, and The Maple Leaf Academy — in Vietnam.

Ho Chi Minh City-based EQuest has also been expanding through M&As with the backing of TAEL Partners. The company, which began as a language and enrichment courses provider, has grown from one brand into a group of 16 units including K-12, tertiary, and edtech, in addition to supplementary education. EQuest has been a serial acquirer in Vietnam, adding brands like Newton School, Alpha School, American Polytechnic College, Phu Xuan University, Saigon Polytechnic and, most recently, Hanoi College of Economics and Technology to its stable.

Meanwhile, Navis Capital Partners-backed IGC Group (formerly Thanh Thanh Cong Education) acquired Sonadezi College, and Yersin University of Dalat in 2018. Its network covers preschools, K-12, and higher education centres spread across 20 locations. The firm announced its rebranding to IGC Group earlier this month.

Nguyen Hoang Group, which life in 1999 as an IT equipment distribution business, opened its first private K-12 school in 2008 and has since grown to 10 school brands in the K-12 and higher education segments with nearly 60 campuses, through M&As. The firm, however, is not PE-backed.

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Education platforms: Opportunities & Challenges

Education deals, especially in kindergarten and K-12 schools, are expected to continue to flourish, with more M&A and PE transactions picking up steam, advisory firm Grant Thornton Vietnam said in a November 2020 report. “This segment has enjoyed more attention than any other in recent years, and has always been on the radar of both strategic and financial investors,” the report added.

Explaining the merits of platform play, advisory firm Freshfields Bruckhaus Deringer’s senior associate Chris Milliken said, “by consolidating different brands, you could make yourself more attractive to buyers. You might have four of them [brands]. Each could be worth $10 million, but you want to sell them for $50 million because you think that the synergies are worth [an additional] $10 million.”

EQuest founder Nguyen Quoc Toan claimed that revenues typically grow by at least 30-50% in one to two years after such acquisitions. “As businesses need to scale up, it makes more sense [for single-unit operators or smaller chains] to join a platform and take advantage of the same backend structure and corporate governance standards,” he reasons.

Besides, a platform structure allows an entity to offer diversified offerings to meet different education needs, added Heritas Capital’s CEO and executive director Wai Chiew Chik.

Hurdles to cross

Mekong Capital’s principal Sjoerd Zwinkels, however, cited challenges to the roll-up play: “the available opportunities are limited and so one feasible way is to find a right partner to implement a roll-up strategy.” Mekong is a backer of YOLA and has invested in Vietnam Australia International School (VAS) in the past.

What is also needed for a successful roll-up play is a common vision and alignment of interests between the platform players. “Individual brands are interesting if they become part of a platform. And to build a platform, the key element is the management teams who have the common vision to create a large company,” said Shastri.

The roll-up strategy is a proven trend around the world, according to Toan, but to succeed the management teams would need to excel at both education, financial and corporate management.

That is why investors like businesses with the potential to scale but choose to be selective in consolidation deals. “When they build or buy a brand, it must add to the overall portfolio’s diversity and purpose,” added Chik.

Another concern for education investors in Vietnam is the issue of land banks. While some school companies in the country, like Vinschool and FLC University, have scaled through their parents’ real estate business, it is challenging for others to grow organically because of scarcity.

“EQuest’s model is asset-light. We take majority stakes in acquired businesses but we do not do hostile takeovers. Our operations are based on partnerships where we provide digital content, international curriculum and ERP systems,” Toan says.

Lastly, there is the issue of regulations and licencing norms that determine scalability via M&As. “Some are licensed to provide a different type of school or have been set up as non-profits but are now profit-making,” Milliken observes.

Advantage Vietnam

Vietnam is an attractive investment destination for private investors. “There is a lot of similarity with India where funding had to come from outside professional private capital,” Shastri pointed out.

Even the exit window for private investors seems to be visible given the activity in the secondary transactions space in the sector. In major exits, two language centres, ILA and VUS, were sold to EQT Partners and Baring PE, respectively, while Mekong Capital exited VAS to TPG Capital.

“Vietnam is probably the most attractive education market in Southeast Asia due to its big market with almost 100 million people, coupled with a propensity to spend on education and a strong appetite for learning English. The country also has a history of private equity and secondary exits,” commented Anip Sharma, partner at L.E.K. Consulting and a leader of L.E.K.’s education practice.

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Popular ELT and enrichment courses providers in Vietnam

The number of Vietnamese students from K-12 to tertiary stood at over 23 million, an education ministry official said in October 2020. The official added that total foreign direct investments into education have so far amounted to nearly $4.4 billion by the end of 2019. Most of the investments were channelled into foreign language education, particularly English.

The successful handling of COVID-19 by Vietnam has been a boon for the education sector.

The brick-and-mortar schools were closed for only three months in early 2020. They stayed open during later outbreaks in the year.

Vietnamese love the experience of a physical space that enables social interaction, industry experts DealStreetAsia reached out to said. That said, schools have also quickly adopted technology to boost a blending-learning model to weather the unpredictable COVID-19 storm.