Investors that once rushed into Malaysian higher education must now brace for consolidation

Students huddled around a project. Photo: Van Tay Media

Malaysia’s higher education sector, where private equity-backed institutes have mushroomed in recent years, is now ripe for consolidation, thanks to COVID-induced disruptions that have pushed the sector to the brink.

Enrolment of foreign students plunged 84.1% in 2020, as international travel froze and campuses shut down, according to estimates by the Malaysian Association of Private Colleges and Universities (MAPCU). The association pegged the losses faced by the sector at 6.9 billion ringgit ($1.7 billion) in 2020.

“We’ve been having online classes since last year. I haven’t been to the campus for the current academic year, which started in September 2020,” Ng Yi Xian, a final year local student of economics at the University of Nottingham Malaysia, told DealStreetAsia. She said the tuition fees remain the same even as students have been pressing for discounts.

Falling enrolments and disgruntled students are an ominous sign for several private equity funds, and other investors backing the schools, who had bought into Malaysia’s ambitions to become an Asian hub for higher education.

The investors include PE firm Navis Capital that backed SEGi universities and colleges; KV Asia that invested in Asia Pacific University; Southern Capital, which is an investor in HELP University; and the government-linked PE firm Ekuiti Nasional (Ekuinas), which has backed UNITAR International University and Kuala Lumpur Metropolitan University.

Prominent deals in the sector in the last decade include:

Expand Table

Higher Education AssetsBuyerSellerInvestmentSize ($ mn)
INTI EducationHope Education GroupLaureate Education Inc2020140
KDU University and CollegesUniversity of WollongongParamount Corporation Bhd20199
Asia Pacific Institute of Information Technology Sdn. Bhd. KV Asia Capital Pte. Ltd.Ekuinas2018181
INTI International University & CollegesAffinity Equity Partners Ltd.Laureate Education Inc2017180
APIIT, APIIT Lanka, APUILMU Education GroupSapura Resources Bhd201660
University of Cyberjaya (formerly CUCMS Education Sdn Bhd)Minda Global BhdSMRT Holdings, SMR Education201637
Minda Global Bhd (72.98% Stake)Arenga Pinnata Sdn Bhd (Creador) Siva Kumar M Jeyapalan, public201551
Minda Global Bhd (formerly ASIAMET Education Group Bhd) (30.75% Stake)SMRT Holdings Berhad; Arenga Pinnata Sdn Bhd (Creador)Siva Kumar M Jeyapalan201520
HELP UniversitySouthern CapitalSelangor Properties2015
Cosmopoint GroupEkuinasDatuk Idrus Mohd Satha201260.3
Source: L.E.K Consulting, DealStreetAsia

The investments made sense at a time when students were entering Malaysia in droves, drawn by a host of factors — affordable tuition fees, a low cost of living, and Malaysia’s higher rate of English proficiency compared to its neighbours.

“From a PE investor’s perspective, the relatively lower costs of study in Malaysia provided more sustainable margins and investor returns,” said Jeremy Tan, managing director, KV Asia.

Government policies, too, were favourable. Long-term strategic plans such as Malaysia Education Blueprint 2015-2025 — which aimed to improve graduate employability to 80% by 2025, from 75% in 2015, and place one Malaysian university in the Global Top 100 by 2025— were put in place. The blueprint also aimed at increasing the number of international students to 250,000 by 2025, from 108,000 currently.

In 2011, the government allowed up to 100% foreign equity ownership in the education sector. The education sector was also listed as one of the 12 sectors that would catapult the country to high-income status by 2020.

“Permitting up to 100% [foreign] ownership in tertiary education allowed repatriation of profits or funds [for PEs],” said Tan.

The flip side of these conducive policies, though, was the over-proliferation of institutes. There are 443 private higher education institutions (PHEI) in the country, according to a PwC Malaysia report published in May 2020. Of these, 10 are elite foreign university branch campuses (FUBC) that charge the highest fees, 12 are top-tier local institutions, and then there are 33 mid-tier local institutions as well.

At 14 private higher educational institutions per million population — compared with five in Singapore — the market is now oversaturated, possibly paving the way for a consolidation that has been further catalysed by the pandemic.

Consolidation on the way

Consolidation will affect the premium- and lower-end of the private higher education sector, say experts.

“Some higher education institutions that were struggling financially before the pandemic face the risk of closure or being taken over. We are anticipating consolidation within some market segments, particularly within the [premium] upper- and lower-end higher private institutions that have under-utilised capacity,” PwC Malaysia deals partner and deals strategy leader Yennie Tan told DealStreetAsia.

“In the current economic climate, we also expect some markdown by students who had chosen to study overseas, or in a premium foreign university branch campus (FUBC) in Malaysia. They may now shift to more affordable options within the country. Hence, there could be some divestments in the FUBC category,” she added.

The fight for quality may result in the weaker competitors dying, said Anip Sharma, partner and leader of education practice at L.E.K Consulting. “I think the bottom 10%, or maybe even 20%, are not going to survive. The bottom 20% are going to fade away because they will not be financially viable,” he added.

A lecturer in a UK university campus told DealStreetAsia, requesting anonymity, that competition has increased in recent years as more foreign universities have established branches in Malaysia. “Foreign or local students nowadays are spoilt for choice. There are UK universities setting up branch campuses here,” he said.

MAPCU president Parmjit Singh warned that one-fifth of private higher education institutes nationwide were at risk of closure, local media New Straits Times reported in July last year. The impact from international travel restrictions that hindered new foreign students intake last year is expected to persist for at least the next two years, according to him.

Even if the COVID-19 pandemic ends, private universities and colleges need a few years to regain their footing to recover from the “three empty years [2020-22]”, Singh told The Malaysian Reserve in a report dated Oct. 20. “We are imagining a recovery cycle of five to six years at the minimum,” Singh said.

The government has also issued a moratorium on the issuance of new licences for private higher education institutions due to the oversupply. This, in turn, could encourage M&As within the sector as new players may have to acquire existing institutions to secure operating licences, said PwC’s Tan.

Also pushing consolidation will be the weak demand for private higher education as Malaysia’s GDP growth slowed from 7.4% in 2010 to 4.3% in 2019, according to Sharma. “A lot of new campuses were built with a lot of capital, but the demand has not grown at that pace,” he said, adding, “we have entered into a regime where the market growth rate has slowed down but the competitive pressures have increased.”

Opportunities persist

This does not suggest it’s all gloom and doom for the sector.

Tan of PwC said consolidation is positive for the overall industry and will pave the way for more M&A transactions in the private higher education space in 2021 and beyond. “A shakeup or consolidation within sub-market segments will strengthen the overall higher education industry, which is currently fragmented. We believe players in the mid-tier higher education market have defensible positions, as there is a strong local market for affordable, good quality private higher education in Malaysia,” she added.

The strength in the enrolment numbers of domestic students, who account for 90% of overall enrolments in Malaysia, is also encouraging. Even universities and colleges with the highest exposure to foreign students have only 30-50% of such students on their rolls, according to data compiled by L.E.K Consulting. This includes Xiamen University, SeGi University and Colleges, UCSI University, and Asia Pacific University (APU), among others.

SEGi University, for instance, told DealStreetAsia it is still seeing a relatively healthy enrolment, despite the challenges brought about by COVID-19. Investing in electronic teaching tools, and online learning portals are among the initiatives SEGi has implemented.

At HELP Education Group, the share of international students stands at 15%. The group’s managing director Eu Khin Chan told DealStreetAsia that new enrolments were hit during the COVID-induced lockdowns, but the situation began to pick up in the second half of 2020.

“We are still slightly below 2019 [in terms of enrolments]. We achieved higher domestic enrolment but international students remain locked out due to travel bans,” he said. However, Malaysia’s government has been supportive of higher education providers and allowed enrolling international students as online learners, Chan added.

The private higher education market in Malaysia is expected to grow at a compounded annual growth rate of 4.5% between 2020 and 2024 to about 17 billion ringgit ($4.2 billion), according to the PwC report cited earlier.

The country is, therefore, still getting interests from private investors.

In March 2020, it was reported that Hope Education, a unit of the HK-listed, China Everbright-backed Hope Education Group Co., Ltd, has agreed to acquire a 62.11% stake in Malaysia’s private higher education player Inti Education Holdings for $140 million.

With the acquisition, Hope Education expects to expand in the market in line with its long-term business sustainability goals. Inti Education, a subsidiary of Laureate Education Asia Limited, offers degree courses in higher education and owns one university and five colleges in Malaysia. It is also recognised by the ministry of education of China.

“Malaysia remains an attractive destination for foreign students in the region, given its favourable currency exchange, affordable education cost and living expenses, high-quality education, and the multicultural background of Malaysia,” Tan of PwC noted.

“In Southeast Asia, there aren’t too many markets where you can find investment opportunities in higher education, so Malaysia is still on people’s radar,” said Sharma of L.E.K Consulting.

The successful experience of private investors in Malaysia’s higher education sector could serve as success stories for other potential investors who seek opportunities in the market.

For example, Selangor Properties sold a 51% stake in HELP Education to Southern Capital-backed Better Education Enterprise in 2013; Ekuinas exited from APIIT Group by selling a 100% stake to its management and PE firm KV Asia in early 2018; and Laureate Education exited from Inti Education by selling to Hong Kong’s HOPE Education Group in September 2020.

There are also existing players that are looking to exit or partially exit from their education portfolios.

In December 2020, Bloomberg reported that University of Nottingham Malaysia‘s owners Boustead Holdings and YTL Corp are weighing a sale of their stake in the offshore campus of the British university.

The newswire also reported that owners of Navis Capital Partners-backed education group SEG International are considering selling their stakes. The asset was said to have drawn some interests from potential suitors including Chinese companies.

The potential buyer universe for quality players includes strategic investors, Asian conglomerates, and private equity investors that may come from China, the US, the UK, and the Middle East.

The sector generally remains attractive for its yield and growth prospects, said Tan of KV Asia.

Moving forward, the key question investors face maybe how to create value, Sharma said.  When investors put money into an education provider, this party may need to have the conviction about the right management team to create value and grow the asset.

In general, Malaysia has reached a certain level of participation for higher education at around 40-45%. The number is still lower than Singapore’s participation level of 75-80%. “The market still has growth opportunities…obviously not very high growth, but the market still has significant runway for growth for strong operators,” Sharma noted.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.