Education funding reaches fever pitch

Education is vital at a time when improving workforce quality is of most importance Photo: Le Toan

The latest mergers and acquisitions (M&A) deal in education involves Navis Capital Partners, a Malaysia-based fund managing a $5 billion portfolio focused in Asia. Navis completed investment in Thanh Thanh Cong Education JSC (TTCE), a high-quality Vietnamese private education provider operating in the south of Vietnam. The investment value has yet to be disclosed.

Education is a new area sector for Navis, having mainly placed capital into consumer goods, industry, and retail services. In Vietnam, Navis has poured money into Go Dang JSC, OPV Pharmaceuticals, and is investing in Hanoi French Hospital.

TTCE is one of the biggest private school chain established in 2007. It currently owns and operates 17 schools and English training centres, and has identified and secured land for an additional four schools which will open for the 2020/2021 academic year. Navis and its partners will continue to grow the platform by opening new schools in underserved areas and expanding services in both new and existing schools.

Another remarkable M&A deal is the acquisition of Hoa Sen University by Nguyen Hoang Group. The deal value was not disclosed but to become the largest shareholder of a famous brand like Hoa Sen, some investors may be able to visualise somewhat the value of such a deal.

The scale of Nguyen Hoang’s activities is large, with more than 40 projects and 50,000 students. Besides Hoa Sen, the group also owns Hong Bang International University, Gia Dinh University, and Ba Ria–Vung Tau University.

Last year, Nguyen Hoang founded an international education city (IEC) in the central province of Quang Ngai. With the total investment of VND1 trillion ($43.47 million) and an area of 10 hectares, the IEC project is expected to become a stepping stone to entering and conquering the central market for the group.

The educational investment also attracts overseas financial institutions. Mekong Capital announced that Mekong Enterprise Fund III, Ltd. invested $4.9 million into YOLA Education JSC for a minority stake. YOLA is the sixth investment announced by Mekong Enterprise Fund III.

Elsewhere, Swedish private equity firm EQT Capital Partners, through its subsidiary EQT Mid Market, has poured an undisclosed amount into English learning company ILA Vietnam. IFC and Aureos Fund invested $10 million in Vietnam USA Society English Centers, and TAEL Partners injected $10 million in IvyPrep Education.

Meanwhile, TPG Capital has reached an agreement to become a major shareholder of Vietnam Australian International School (VAS). As part of this deal, two of VAS’ existing shareholders, Mekong Capital and Maj Invest, have fully divested their holdings.

Lucrative market

Observing increasing interest in education from both local and international investors, Kenneth Atkinson, executive chairman of Grant Thornton Vietnam Ltd., told VIR that such a trend is consistent with the company’s private equity survey this year in which 35.4 per cent of respondents selected education as the second-most attractive sector over the next 12 months in Vietnam.

“There are two main factors driving this growth. First, the increase of the middle-income class in Vietnam. The middle class is expected to see an increase from 12 million people in 2014 to 33 million in 2020,” Atkinson said. “The average income per capita in Vietnam is expected to increase from $1,400 in 2014 to $3,400 over the next few years, while the family size is shrinking. Of course, the average per capita income is considerably higher in the major cities and exceeds $5000 in Hanoi and Ho Chi Minh City.”

According to Atkinson, the second factor is that the rise in the number of public schools has not been in line with increase of population. Moreover, parents want to equip their children with more soft skills that are not offered in public schools. The private sector has stepped in to meet this demand.

“The reason why education has become a potential segment for M&A activities is quite easy to see,” Atkinson continued. “The potential market size for education is enormous due to the big supply and demand gap.”

Legislative changes drive M&A

Nguyen Lan Phuong, partner at Baker McKenzie Vietnam, told VIR that Vietnam’s educational market is very promising and active. Vietnam’s World Trade Organization commitments in the educational sector, together with the domestic education-related laws and decrees, such as Decree No.86/2018/ND-CP on foreign co-operation and investment in education, have laid a foundation to bring in foreign investors.

Based on statistics by the Ministry of Education and Training, overseas funders have invested in the entire range of education service areas from K-12, vocational, and collegiate education, to language centres and education technology. While establishment of institutions are subject to many requirements, such as legal licences and permits, and operational requirements like per student capital and minimum teaching experience, M&A is the chosen path for ­investors to approach the market.

“We have observed a lot of interest from industry players and private equity funds with a focus on education,” Phuong noted. “We have seen foreign financiers that want to invest in minority ownership first to test out the market, and we have also seen a number of players that have made substantial investment in education institutions.”

In addition to and in preparation for foreign M&A investment into Vietnam in the education sector, Baker McKenzie has also observed the recurring trend of local market consolidations amongst prominent private-sector educational groups.

“We think with Decree 86, together with its lifted restrictions in enrolment cap of foreign-invested K-12 institutions, Vietnam’s educational sector has become even more of an attraction,” Phuong said. “Furthermore, with the 94-million people population and a young demographic profile, the appeal of the educational sector is a given. Last but not least, the Vietnamese economy is switching from primary labour-intensive manufacturing to more services. So the educational sector is front and centre as the need to upgrade the capacity of the workforce becomes more urgent.”

Favourite targets are English language training schools, and international schools with high revenue and famous brands. Long-term investors are willing to bet on domestically-owned brands that have an aggressive development plan, and are able to expand the network quickly.

Challenges to overcome

According to Atkinson of Grant Thornton, the biggest market segment is mass, upper mass, and affluent mass, both in the area of English language training schools and K-12 schools, depending on the funding strategy of the investors.

“The K-12 system with stable customers and revenue model is always attractive, while the demand for English training schools has always been high, and requires less capital expenditure to develop,” he said.

However, none of the investment segments contain zero challenges. The first obstacle in the segment is the shortage of attractive opportunities at a size suitable for foreign buyers. The competition for deals has been high, and this is also reported to be one of the biggest challenges, according to investors in Grant Thornton’s 2019 private equity survey.

“Licensing may be quoted by the public as a challenge for foreign investors in the educational section but this is not significant, and procedures have been changing in a way that is more supportive for foreign investors, especially the change in the number of local students allowed in foreign invested schools,” Atkinson added. “On top of that, the common challenges for private equity investments are also relevant, such as the valuation gap between buyers and sellers, and the expectation gap in terms of transparency or corporate governance.”