The growth of private spending on education presents an opportunity for private equity. While public spending on education in the OECD as a proportion of gross domestic product decreased slightly between 2003 and 2012, the number of students attending private secondary institutions in the OECD rose from 11.07% to 15.99% during the same period. An indication of the global demand for quality private education is that by the end of 2015, UK elite public schools had set up 44 international branches around the world, most notably in the Middle East and the Far East.
The opportunity for private equity is in both direct education providers, those businesses that “teach” students – childcare, infant, secondary and tertiary institutions – and for service providers to those institutions – for example, providers of technology solutions. The latter type of investment space, frequently referred to as “Edtech”, has seen aggregate global deal size grow from $1.82 billion in 2009 to $5.5 billion in 2015.
It’s a similar marker of growth for the number of buyouts globally in education businesses, which has increased year on year from 2010 until 2015 with a five-year increase of 61.25% against 2010. But like investments in other sectors that have historically been dominated by public investment (for example, healthcare or aged care), investments in the education sector, particularly direct providers, are not without their challenges. Most obviously is the tension between business performance and educational outcomes: the ease with which the performance of a business can be assessed – distilled in revenue and earnings numbers – is in contrast with the variety of factors relevant to determining the quality of the educational experience; exam results are but one indicator. In short, investments in the direct educational sector are prone to the challenge that educational outcomes are being compromised for the sake of business performance, whether actual or perceived. Such a challenge can have significantly adverse impacts on the reputation of a private equity investor.
In addition, there are a number of industry specific issues that are relevant to investments in direct education providers, a selection of which are listed in the box below.
In our view, the relatively flat public investment in the education sector and the increasing proportion of enrolments in private education providers mean that the education sector will continue to be attractive for private equity. This is the case both for investments in direct education providers and investments in service providers to those institutions.