International funds dive into southern Europe's education sector

Alessia Argentieri
15 October 2019

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Southern Europe has recently seen a surge in large deals in the education sector, with private equity firms eager to buy into this lucrative industry. Alessia Argentieri reports

Across the education segment in southern Europe, business schools able to provide practical job-related skills, institutions offering life-long learning, and online universities providing distance learning are flourishing and have attracted the interest of numerous investors.

At the end of 2018, Permira acquired five universities located across Iberia from Nasdaq-listed Laureate Education for €770m by deploying capital from its €7.5bn Permira VI fund. The universities included in the deal were Universidad Europea de Madrid, Universidad Europea de Valencia, Universidad Europea de Canarias, Universidade Europeia in Portugal, and Instituto Português de Administração de Marketing.

Subsequently, CVC Capital Partners bought a majority stake in Universidad Alfonso X El Sabio, a Spanish private university located in Madrid, in a deal valued at around €1.1bn, equal to 14x the company's annual EBITDA. The GP drew capital from its CVC Capital Partners VII fund, which held a final close in June 2017 on its €15.5bn hard-cap.

A few months later, CVC used the same fund to buy a 50% stake in Multiversity, the owner of Italian online universities Università Telematica Pegaso and Mercatorum University. The deal gave the company an enterprise value of €750m, equal to 15x its 2018 EBITDA of €50m.

More recently, Palamon Capital Partners has increased its stake in Business School24, the education and training unit of Italian newspaper Il Sole 24 Ore, buying the remaining 49% in the company and becoming its sole shareholder.

"The sector offers an array of attractive assets for a private equity sponsor, with great opportunities for consolidation," says Giuseppe Rana, a PwC deals partner leading the education sector in Italy. "Education companies are able to generate recurring revenues and have an attractive cash profile, two features highly valuable for private equity firms. Furthermore, this is a non-cyclical industry, which can prosper even if the economic and political climate deteriorates, and it is witnessing a growing demand for quality education and disruptive technology."

Strict selection
The majority of deals in the education sector were inked this year by large international private equity firms, with smaller local funds discouraged by high entry multiples, ranging between 12-17x EBITDA. In addition, sourcing deals in the education sector requires a different type of network and due diligence compared with transactions made in the industrial or consumer space.

"The entry multiples are higher than other industries because finding excellent, strategic assets in a sector in need of modernisation like education can be challenging," says Fabio Massimo Giuseppetti, partner at Palamon Capital Partners. "We look for companies with stable revenues and high-growth potential, able to increase their profit in the short term, when supported by the right sponsor. With these premises, the entry multiple is much less relevant and we are able to see beyond it."

Alternatively, an additional strategy to enter the sector consists of acquiring smaller and less profitable businesses at a lower valuation and subsequently pursuing a buy-and-build strategy aimed at creating an aggregation platform.

"This can be a very successful approach to maximise value creation and lead to higher multiples in an exit scenario," says Giuseppetti. "We expect to see very intense activity in the consolidation space across the sector in the next five years."

Despite its growing potential, investing in education entails a series of challenges and risks for a private equity player, including regulatory compliance, the need to meet governance, transparency, and consumer protection standards and possible tensions between the sponsor and the incumbent management.

Rana says: "Regulation is among the industry's challenges, with local governments imposing tighter standards to measure and enforce the overall quality of educational services, beyond the licensing and accreditation requirements. In addition, for a private equity buyer there is also a reputational bias that might affect its relationships with the company's stakeholders."