Emerging market investors buy into education

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,” he said.
Mancosa is now part of Actis’s expanding higher education portfolio in Africa.
It has spent $275 million 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 also 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 low- and middle-income countries will need to increase from today’s estimated $16 billion per year to $89 billion 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.
“Its 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 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,” said Patricia Ribeiro, an Equity Portfolio Manager at American Century Investments.
Carlos paid a deposit of 25,000 rand ($1,876.38). If you pay up front the total is 70,500 rand but the monthly payments that she has chosen bring the total to about 90,000 rand 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 end of secondary school will grow 8 per cent annually to become a 3 trillion yuan ($460 billion) market in 2020, the bank told clients.
Recent regulatory changes are set to benefit private tutoring firms, many of which prepare high-school pupils for university.
TAL said in July that student enrolment was up more than 60 per cent year-on-year, with a matching rise in revenue. Its stock has soared 180 per cent since January.
New Oriental Education projects revenue growth of as much as 24 per cent in the three months to end-August.
Its shares are up 114 per cent since the start of 2017.
“China is very exam-driven from kindergarten on and they are competing more and more with US schools,” said Sandra Ackermann-Schaufler, Senior Portfolio Manager for emerging markets at SEI.
“If anyone thinks it’s tough to get into US universities they should look at the top Chinese universities, the growth you could see is explosive growth.”— Reuters

Karin Strohecker