Canny investors buy into education

Fees at private facilities guarantee regular income stream

TWO decades after Yusuf Karodia launched Mancosa, a distance learning school to teach South Africans business skills, he sold up to UK private equity firm Actis. From nurseries to exam tutoring and adult education, teaching businesses are booming as populations rise and cash-strapped governments fail to keep up with demand.

With 263 million children out of school worldwide, according to 2014 data from the United Nations, investors are keen to access a growing sector with few publicly listed companies.

Karodia said Actis was one of a stream of interested private investors. “We had about an overture a week to partner with someone.”

Mancosa is now part of Actis’s expanding higher education portfolio in Africa. It has spent $275-million (R3.65-billion) since 2014, investing in education institutes across the continent, which it groups under the brand name Honoris Universities, and plans to list on a stock market in the next two to three years.

Karodia, who will get a stake in Honoris, says there is huge demand for education in Africa.

“Quality education – especially coming from the private sector – is going to play an ever increasingly important role,” he said.

The International Commission on Financing Global Education Opportunity estimates that international financing for education in lowand middle-income countries will need to increase from today’s estimated $16-billion (R212.5-billion) a year to $89-billion (R1.18- trillion) by 2030.

Jetilde Carlos is a 22-year-old final-year finance student at the Varsity College in Cape Town, owned by Johannesburg-listed ADvTECH Group. Carlos missed out on a place at a state university.

“It’s not that my parents had the money but they really wanted a better life for me. They didn’t want me to sit at home looking for a job when I might not even find one,” she said. “The degree is worth it in the end.” Investors are keen for a slice of the market because the fee-paying structure guarantees a regular income stream.

The sector is also relatively resilient to economic ups and downs as parents increasingly prioritise their children’s education.

“It goes with the whole consumer spending [trend] in emerging markets, and as income levels rise and there is more disposable income available, what you’re seeing is the population is looking to spend in areas such as education,” Patricia Ribeiro, an equity portfolio manager at American Century Investments, said.

Carlos paid a deposit of R25 000. If you pay up front, the total is R70 500 but the monthly payments that she has chosen bring the total to about R90 000 for one year’s tuition.

The sector is dominated by private equity players. MSCI’s emerging equity index contains only three education stocks – New York-listed Chinese firms TAL and New Oriental Education and Brazil’s Kroton.

Morgan Stanley describes shares in Chinese education operators as attractive.

China’s education market catering for children from nursery to the end of secondary school would grow 8% annually to become a 3-trillion yuan (R6-trillion) market in 2020, the bank told clients.

Brazil became another destination for those seeking exposure to education stocks after 2009 when the government boosted loan programmes for students attending for-profit colleges.

While the recent recession in Latin America’s biggest economy led to a fall in student loans, the biggest companies are already well-established, fund managers said. The Gulf region also offers opportunities. In Africa, many governments want more private investors in education but they are approaching it cautiously. They want regulations in place to ensure the quality is high. – Reuters