Investing in Asian Education: Opportunities and Challenges Prepared for the HKVCA- MasterClass Hong Kong December 2014
Globally, private education is a $1.3T market. Asia accounts for 40% of this spend Private Education Market Size in Asia, By Region, 2012 100% 80 Private Education Market Size, By Continent, 2012 $1.3T ANZ Africa Latin America Europe 100% 80 BruneiMongol Ki Fiji ri bat i Hong Kong Darussal i a SAR am Japan Korea Market Saturation and Regulatory Pressures Singapore Indonesia Philippines Jordan Yemen Kuwait Qatar Iraq Sri Lanka Bangladesh Pakistan Total = $470B 60 N. America 60 Thailand Lebanon Israel Internationalization UAE 40 40 China Vietnam India Iran >25% 20 Asia 20 Malaysia Saudi Arabia 15% 25% 5% 15% 0 Market Size 0 Asia Pac SE Asia Middle East South Asia <5% Affluence and English Affluence, English and Study Abroad 2
Globally education markets are fueled, primarily, by rising household wealth Distribution of Household Income 90 s 00 s 10 s Can Afford Quality Education Percent of Households As income rises, the number of families able to afford private education increases in a greater proportion than household income Household Income Threshold For Private Schooling As average household income rises, the number of households above the private education affordability threshold rises more quickly 3
The last decade has witnessed an exponential increase in investor participation in Asian Education Completed M&A Activity in Emerging Private Education Markets, 2000-2013 500 n=431 400 n=376 300 200 n=191 Asia Asia 100 Asia 0 n=18 Asia 2002-2004 2005-2007 2008-2010 2011-2013 Global Deals Totals 101 349 637 788 4
Education segments vary widely in character 1 2 3 4 5 Long-Term Revenue Visibility High Barriers to Entry Demand Greater than Supply Prices Rising Higher Than Inflation Negative Working Capital Higher Education K-12 Transnational Education ~ English Language Learning ~ ~ ~ Vocational Education ~ ~ ~ ~ Publishing ~ ~ ~ ~ ~ Evaluate assets on the strength of their attributes 5
Common Challenges to Investing in Education Fragmented Markets Small Assets Sparse Information Time- Consuming Process Regulations 6
Asset scale remains a key challenge for investors looking at education in Southeast Asia Market Size of Assets by Revenue Size in Target SEA Countries, 2013 100% ~$10B ~$3B 80 $25M-$50M 60 0-$25M 40 20 $25M-$50M >$50M >$50M 0 Market Size Market Size of Assets with Revenue Greater than $25M 7
Invest in education platforms to build scale businesses and generate returns Annual Turnover of Select Education Companies, FY 2013 Sterling Partners $5B $5B Presence in Asia 1.5 1.0 0.5 Revenue Advent International $850M Patria $768M GP Investments $439M Bregal Capital Barings $400M $400M 0 Laureate Kroton Educational Anhanguera Estacio Cognita Nord Anglia 8
Education platforms deliver superior returns to investors EBITDA Multiple, Global Education Companies, 2013 30X ~28X ~22X 20 10 Valuation Multiple ~18X ~18X ~18X ~15X ~14X Typical Valuation Size of Standalone Education Assets 0 G8 Education AdTech Group Kroton Estacio Anhanguera Laureate Nord Anglia 9
What are the drivers of value creation? 1 Business 2 Financial 1. Top-Line Initiatives a) Pricing b) Student Acquisition 2. Operational Best Practices 1. 5 Characteristics of Education 2. Scarcity of Scale Assets 3. Premium for Entry 3. Cost Rationalization May Not Yield High Returns 10
Investments require systematic approaches to building scale Expert Team Niche Segments Pipeline Development Post-Acquisition Value Creation Plan 70% M&A 30% Education i.e., Transnational Education, International Schools Investment Hypothesis Top-Line Driven 11
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