Rising demand for education in the GCC is driving an investment boom in the sector. The number of announced private equity transactions and mergers and acquisitions in education increased three-fold in the past decade, which resulted in the sector ranking second in private equity transactions of all sectors in the Middle East from 2011 to 2015.
Although rising demand in GCC education is expected to continue, high investment returns are not guaranteed. The sector’s projected growth is already being priced into valuations, and the large amounts of capital earmarked for the sector should ensure that valuations remain strong.
Accordingly, to earn attractive returns, investors first need to identify which of four investment plays are best suited to their risk/ return profiles, and then use a tailored set of value creation levers to make their deals pay.
The first play is to focus on growth in the education delivery subsector that benefits from a relatively mature standing and numerous established local institutions. The K–12 and higher education segments in Saudi Arabia and the U.A.E. offer the most attractive targets, thanks to their large student populations and accommodating regulatory environments.
To maximize deal returns, investors should seek out institutions that operate in growing market segments (such as mid-end K-12 schools offering international curricula), exhibit sustainable competitive advantages, and already have established reputations, as well as room for capacity growth.
Post-acquisition, investors can use many value creation actions, such as pursuing partnerships with complementary feeder institutions, transitioning into assets-light models to unlock funds for growth, and improving utilization by seeking new usages for facilities such as night classes.
The second play is to establish greenfield ventures in nascent subsectors. Investors with a greater risk appetite will find opportunities for greenfield ventures in education delivery niches, such as pre–K (due to the growing numbers of women entering the workforce), special education and vocational training; in education services, such as online tutoring and student assessment services; and in education support services, such as school management systems.
To succeed, investors should seek out plays based on proven business models in other markets and supported by the strategic oversight and resources needed to realize their potential.
Once the operational stage is reached, investors can use many of the same value creation levers as growth-focused acquisitions to achieve top-line growth and scale, while operating as cost-efficiently as possible.
For example, phasing grade roll-outs in new schools, ensuring revenue pools exist before incurring additional costs (e.g., teacher salaries). The third play is to acquire and leaseback the real estate assets of education institutions.
Driven by high land cost prices, an expanding education market, and a more restrictive funding environment, GCC educational institutions are showing an increased appetite for sale-leaseback transactions.
For example, in 2013, PineBridge acquired a GEMS campus in Dubai, leasing back the property for over 20 years. To succeed, investors need to secure a stable and well-maintained asset to limit unplanned capital expenditures, select a financially successful operator to limit single tenant default risk, and secure a long-term, inflation-protected and price-indexed lease agreement.
The fourth play is consolidation, which will come with sector maturity. Consolidation plays are currently rare in the GCC education sector because of its relative youth and strong demand, both of which favor less complex plays.
That will change as the sector matures, and buyers seek to optimize fragmented investments, realize scale advantages, and unlock incremental returns.
To unlock the most value, acquirers will need to identify multiple, fragmented targets with similar or complementary market positioning (e.g., target segments and price-point combinations), value proposition (e.g., curriculum and quality of education) and geographies.
Once the deals are made, the new owners will be able to use margin improvement levers, such as the centralization of back-office administrative functions, shared teacher resources, and supply chain optimization to cut costs.
The GCC education sector is already attracting investors from around the world.
To capitalize on this opportunity, buyers will have to identify opportunities in market segments that feature favorable combinations of curriculum, price point and geography—and tap into the right value creation levers after their deals close.
Source:-.forbesmiddleeast
