Buying and building the modern school

Investments in European private schools and colleges have proven enriching experiences for private equity over the past two decades. Two widely cited success stories in particular, Cognita and Alpha Plus Group, delivered impressive returns on investment. Bregal backed the £57m carve-out of Cognita in 2003 and, following a joint KKR- and Bregal-backed SBO in 2013, the business was eventually sold to Jacobs Holding for £2bn in 2018. Sovereign Capital's £25m acquisition of Alpha Plus in 2002 was followed by a £113m exit to Delancey five years later.

The popularity of the sector is largely based on strong underlying fundamentals. These include predictable revenue streams, customer loyalty – with parents unlikely to move children without good reason – and ongoing organic growth from an increase in international students. Potential investors are also attracted by the fragmented nature of, and the potential for international expansion in, the education sector.

Synova Capital partner Tim Ashlin points to the current macro- and demographic-fuelled pressures being placed on state-run schooling systems, with increasing class sizes and a decrease in overall public spending. For its part, Synova backed newly founded UK-based independent schools group Chatsworth Schools in March, having worked with the management team for around a year prior to the initial acquisition of sites.

"As with all investments, you have to make sure that you back the right management team and that you do so in the right way," says Ashlin. "The sector is very sensitive when it comes to explaining to parents that an investor now owns a particular school and what that means. We were very careful to back a team led by a CEO who was a former teacher and headteacher – a real educationalist at heart." Ashlin also highlights the benefit of schools typically being underpinned by assets, namely the sites and buildings from which they operate.

The market has matured and business models need to be strategic, rather than straightforward market consolidation without any real focus on specific emerging demand" – Tom Shelford, Bowmark Capital

Lessons in risk
Yet Cebile Capital managing partner Sunaina Sinha says the real estate element to investing in schools presents challenges, as well as opportunities. "Repeatable cashflow gives you the ability to expand into other markets, through the building of new schools or via buy-and-build strategies," she says. "But a key consideration is the level of real estate risk and debt associated with these businesses. You need to have an understanding of what loan value is on the books, both in terms of expansion debt and property."

On the build-up front, Bowmark Capital continued the expansion of Oxford International Education Group by bolting on Oxford International College in April. There are two real areas of focus to growth strategies in education provision, says Bowmark partner Tom Shelford: developing capacity in areas of undersupply and developing business models for changing parent demand. "An increasing number of parents are looking for day schools at secondary level rather than boarding schools and there is a cohort of parents wanting support for their children at prep-school level to gain admission into the state grammar school system," he says. "The market has matured and business models need to be strategic, rather than straightforward market consolidation without any real focus on specific emerging demand."

Future-proofing
One specific in-demand segment that has emerged as an investment opportunity is "edtech", or education-related technology. Recent deals in the space include Horizon Capital's management buyout of EES For Schools; Northzone- and Creandum-backed Kahoot's acquisitions of Dragonbox and Poio; and TPG Capital's sale of TES Global to Providence Equity Partners.

"Stepping back and thinking about how schools run and how learning is imparted to pupils, it has not changed much in a long time," says Jeremie Sokolowsky, a partner at TMT-focused M&A advisory firm Arma Partners, which advised Providence on the TES deal. "There is an increasing need to equip children with the skills that future employers need. Technology can help teachers and school heads make better use of resources, and provide experiences that are more adapted to a generation of digital natives."

Bowmark's Shelford says the very nature of education – with its focus on recording, analysing and reacting to data – makes it a prime sector for technological development. "The opportunity is incredibly exciting across a number of services," he says. "But, in particular, in e-learning, provision and assessment of content and in measuring, assessing and supporting students outside of the purely high-stakes assessment milestones."

Yet Shelford stresses that investment in edtech remains at an early stage in Europe, a view Cebile's Sinha agrees with. "The school system in Europe is very regulated and more state-run, compared with the US," says Sinha. "When you are selling tech services into schools, you are effectively selling into government. That is a much longer and harder sale, and that is why it will likely take longer for many of these businesses to mature in Europe." 

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