Education investing: does the pricing add up?

Amy King
24 September 2014

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The education sector is experiencing huge growth on a global scale, and private equity is crowding in. Amy King investigates the impact on pricing

"An investment in education always pays the best interest," wrote Benjamin Franklin in The Way to Wealth in 1758. And two-and-a-half centuries later, it is not hard to see why a more literal interpretation is being observed in the private equity industry.

The education sector is forecast to grow by a compound annual growth rate of 7% per year in the period 2012-2017, resulting in a global market worth $6.3tn in 2017, according to a UK government report. The sector is the second largest on a global scale, behind healthcare.

And GPs are committing serious cash to the sector. In 2013, investments in education companies, including both bricks and mortar and online offerings, were worth a total of €873m, with investors plunging more cash into these businesses than ever before, according to unquote" data. From Teachers' Private Capital's acquisition of nursery group Busy Bees to Apax's purchase of French business and management schools operator Inseec, activity occurred across the board last year.

"There has been a huge amount of interest in recent deals, mainly because sector dynamics are strong and there is a lack of assets," says Matthew Taylor, director on the business services team at DC Advisory, which advised Palamon on the sale of Cambridge Education Group to Bridgepoint last year for £185m, generating a 14.6x return. It is clear to see why GPs are drawn to the sector, but what has the combination of strong drivers and a shortage of assets done to pricing?

Multiple choice
"With Cambridge [Education] it was a very skilled process, but it's clear that there is a shortage of businesses like it in the market. And high-quality, internationally exposed education businesses are trading for significant double-digit multiples," says Taylor. "They are substantial multiples compared to what we've seen historically and what we've seen traditionally in other sectors."

One asset that has long caught the industry's eye is Education Personnel, a supply teaching business, understood to have been valued at the high end of the scale. The company has a history of private equity ownership, dating back to 2001 when Equistone (then Barclays Private Equity) bought the business, according to unquote" data. In 2007, RJD Partners led the £24m secondary buyout of the company (then Teaching Personnel). RJD's investment was supported by management reinvestment and £14m of banking facilities provided by Yorkshire Bank.

In 2010, Graphite backed the £45m management buyout of the firm from RJD. The following year, the company was merged with Protocol Education to create Education Personnel. The firm's private equity ownership came to a close in 2014, when Graphite sold the company back to its management in a buyout backed by ICG. The business was understood to be sold for £300m, generating a 6x return for Graphite, a price widely thought to stand in the double-digit EBITDA multiple range.

International outlook
The Cambridge Education deal exemplifies a strong driver propelling the sector – the growth in the international student base – which has caught GPs' attention. "It's an enormous growth sector at the moment and we have only seen the tip of the iceberg of international students coming through pathway providers like Cambridge," says Taylor. "The issue is trying to find them places to go rather than finding interest from students."

However, with international students often drawn to a small number of well-established brands imbued with tradition, the space for new market entrants is small, leading to fiercely fought deals. "There's a real dearth of assets, and that has driven prices commensurately higher," says Taylor.

And in the UK, the development of the international student base has been, in many cases, underpinned by the policy of government agencies, according to Michael Needley, founding partner at Sovereign Capital. The GP has invested in the education space since its first fund in 2001, backing companies such as international schools group World Class Learning, sold to Nord Anglia Education, generating a 5.3x money multiple and 70% IRR in 2013. "Over the years, a number of smaller educational establishments were bringing in international students, but the students were perhaps there for reasons other than just studying," says Needley.

"The UK Border Agency (now UKVI) has done a very good job in recent years of clamping down on that practice, which has allowed the higher-quality institutions to go on and be very successful," says Needley. "If you invest in the quality end of the sector, then you can achieve some very important results." And with demographic changes such as the inverted pyramid structure developing in Chinese society, which leads to a single child's education receiving the support of both parents and grandparents, it is easy to see why the asset class is ready to cough up cash and commit to the sector.

Room for improvement
Further drivers have emerged on a national scale, with a clear negative impact on the country's economy. "Our education system in the UK is not fit for purpose; it is not producing the level of skilled workers we need for a variety of reasons," says Charlie Johnstone, partner at ECI Partners. And that shortage of high-skilled workers is having a tangible impact on UK growth companies – the backbone of economic development and job creation. According to the 2014 Growth Report recently released by ECI, 82% of growth companies said they are currently experiencing a skills shortage, with IT professionals the most in demand as a result of the fast pace of digital development.

"It was an obvious conclusion from trying to get 50% of people into further education, without having further education colleges producing people who are fit for work. So I am not surprised, therefore, that there is an opportunity for smart capital to come in," says Johnstone. Against such a backdrop, increasing competition within private equity for assets operating in the education space seems unsurprising.

"So many deals are happening and they're an interesting spread," says Taylor. "It's almost all private equity-led, and the asset class has been more forward-thinking than trade have in that respect. We see trade players in processes, but we don't see them as being as competitive as private equity."

In today's market, it seems competition has been largely homogenous, with GPs competing against GPs. But a change in the opposition could change the playing field; although trade behemoth Pearson may have reported a 41% drop in H1 profits this year, its adjusted operating profit of €73m for the first half of the year is not to be scorned. If trade titans enter the ring and push up prices, would an investment in education still pay the best interest?