Lessons from 10 years of Investing in Education in MENA

By Imad Ghandour, Managing Director, CedarBridge Partners

In 2006, early in my private equity career, I was amongst the few in the Middle East and North Africa (MENA) region that realized the attractiveness of education as an investment theme. Then, education was regarded by most to be exclusively a non-profit activity aimed to social development. Governments, religious institutions, philanthropists, and ambitious educators dominated the sector, and they were all driven by their development agendas rather than profits. 

The increased attention – or may I call it intrusion -- by financial investors like myself over the last decade was new to the traditional actors in the sector. Local educators – like educators elsewhere --  pride themselves to be driven by many things save for profits, and working with IRR-driven private equity managers was not an easy marriage. 

The MENA region presents a unique opportunity in education. The region has a substantial number of families with high disposable income, yet the region’s governments have failed to provide basic services to their citizens – including education services. Therefore, demand is high, and supply for quality education is scarce. Families fight to get their kids in the few good local schools and universities. 

Hence, the education sector in this region offers a unique proposition for investors: sticky and growing demand fueled by the highest population growth rates in the world, stable cash flow from increasing private payers, positive cash cycle paid for upfront, and healthy margins and returns.  These characteristics became more relevant after the financial crisis as investor flocked to defensive sectors with stability and predictability. Fund managers, particular private equity ones, realized the potential of investing in education.

The sector was very fragmented save for a dozen emerging local chains like GEMS in UAE (GEMS was very UAE-centric back in 2006), SABIS in Lebanon, Maarif in Saudi Arabia, Future Schools in Egypt, etc. These local chains realized early on the size of the opportunity, and started to expand locally, regionally and few went all out internationally. 

Until the financial crisis, most of these chains were owned by their founders, and private equity invested elsewhere as returns realized from real estate, construction and public equities dwarfed any return you can get from education. Investors were realizing 100% returns in real estate and IPOs, and few believed in the long-term prospects of the sector and its favorable risk-return profile. 

Two noticeable investments were done pre-crisis and in 2007 to be more specific. Abraaj Capital invested in GEMS, then operating around 60 schools mainly in the UAE, and Gulf Capital, where I was leading the education practice, invested in Maarif Education, then the largest chain of schools in Saudi Arabia. Yet in 2008, these were only two out of a portfolio of 300 active private equity investments.

In September 2008, the financial crisis hit the world including MENA. It was my second year into the Maarif investment, and registration for the new year started in October 11 2008. I was very anxious to see how many students will register, but by the end of that week 110 million Saudi Riyals (c. $30 million) in tuitions were deposited in our bank accounts. Demand for K-12 education proved super inelastic, even more so than demand for oil. 

Post financial crisis, private equity investors tried to invest in education. However, the education sector remained elusive to such investors. Only few transactions were completed. Fund managers complained that there are few deals available, and those available were overpriced.  Moreover, those that invested in the sector faced the inevitable scrutiny attached to social services, limiting their maneuverability in terms of tuition increases, new licenses, new services, and even exit possibilities.  The media and the regulators became increasingly repelled by private equity intrusion and its profit-maximizing intentions. 

Yet, family groups continue to reap significant dividends from the education sectors.  As I have examined hundreds of investment opportunities in the sector, I have invariable noticed how lucratively the initial investors have been rewarded and how significant the business margins were. Hence, the problem may not be with the sector, but with the standard private equity investment template, in particular:

·      Think long term: The traditional time frame of a private equity investment of 3 to 5 years seems unfit for education, particularly K-12, because you can only affect change (e.g. increase tuition, open a new branch) once a year. 

·      Focus on capacity building before margin improvement: private capital is most welcomed when it initially seeks to build new capacity. Focusing in the early stages on tuition increases and margin improvement brings unwanted friction with parents and regulators.  

·      Enter early:  entering at the early stages of the business life cycle allows you to be rewarded by the growth in enrollment, which remains the highest contributor to profit growth. This will also increase the investible number of opportunties. 

·      Talk education before finance: drop the financiers hat and talk about educating the kids. Also, private-equiters are keen to publicize their achievements and their investments, but this is a sector where less talk will improve returns. 

·      Look at other subsectors: K-12 maybe the biggest subsector, but other subsectors like nurseries, e-learning, higher education, etc may be more lucrative and attractive.

Our investment in Kids First Group, currently the largest chain of nurseries in MENA, is a good investment template. We invested in a greenfield holding company that aimed to roll-up small stand-alone nursseries. Our initial investment was $1.2 million but we eventually invested a total of $7 million. EBITDA grow from $200,000 to $4.5 million in seven years as we grew the number of branches and capacity. We are currently into our seventh year in the investment and I believe we can grow it for a couple more years before exiting, bringing the investment horizon closer to ten years – longer than what most private equity funds aim for.