Education : The new holy grail for VC/PE’s- Aravind.G.R

Ask any VC in India these days what their top investment sectors are and more often than not you will hear ‘education’ and ‘healthcare’. ‘Recession proof’, ‘underdeveloped’ and ‘large addressable market’ are phrases that almost certainly ensue.

Let’s focus on education to try and understand where the real opportunity lies.India’s young population and the average Indian households’ propensity to spend heavily on education have been well documented. So are the systemic shortcomings and inefficiencies. The size of the education sector may not come as a surprise; considering each one of us has either spent or continues to spend on education. We estimate the Indian education sector’s market size at $50 bn annually. Except for some sub-segments, theoretically the sector is indeed recession proof. The sector continues to be heavily regulated, especially schooling and higher education; however, private firms have been extremely adept at circumventing antiquated regulations to create opportunities for themselves.

VC/PE investors naturally recognize the potential returns investing in this sector can offer. Based on proprietary research by our education sector team, we present a ‘below the hood’ peek into the sub-sectors that form the education pie.

1. School/College ManagementIf fund managers had their way, they would probably want to run a chain of schools (K12- Kindergarten to class 12) or colleges, with what ever focus (premium vs mid/low income) they deem fit. However, owing to regulatory & to some extent social obligations, schools and colleges in India have to be managed by a not-for profit entity (trust), thereby forcing ‘for profit’ enterprises to largely stay away from the ‘business’ of schools.

Recently we have seen investments by funds in pre-school chains and several private companies engaged in allied businesses taking ownership of school management. Some companies have worked their way around by differentiating the school ownership entity (trust) & school management entity which profits from land lease rentals, supply of IP, hardware, etc. However, we do not believe that school/college management is an attractive investment proposition for funds under the present regulatory conditions.

2. Information and Communication Technology (ICT) for Educational institutions:The ICT opportunity comprises technology solutions for learning, hardware, infrastructure, multimedia content, institution & student management systems, etc, for K12 and higher education.

The ICT business has matured, with strong competition between the established (mostly funded or listed!) players such as Educomp, Everonn,IL&FS ETS and NIIT. However, the addressable market is extremely large and there is an opportunity for atleast a few other players to occupy and service various niches in the space. Content on a standalone basis, we believe is difficult to sell to schools/students and most of the ICT/technology player’s have setup proprietary content development teams.
While ICT is an obviously large market opportunity, we believe that the key to scaling up is the ability to sell to government. Private schools may fetch higher margins, but the sheer volumes that government sale offers is vital for a private ICT player to scale up. Moreover, higher education, which has no nationwide common syllabus like ICSE/CBSE, is also largely untapped by ICT players and presents a potential opportunity.

3. Test prep and Tutorials: Test preparation coaching and tuitions have co-existed with traditional teaching and are an integral part of the Indian education system, especially in urban India. The apparent problem is scalability, especially with tuitions & test prep which tend to be built around individual(s) or at best limited to a particular region. Several test prep institutes such as Career Launcher and TIME have received PE funding. However, we believe that beyond a point scalability will become difficult for brick and mortar only model because of issues such as consistency of coaching, franchisee model pitfalls, real estate costs, etc.

Our hypothesis is that there is an opportunity for a nation wide test prep play through a strong blended model, combining brick and mortar with online delivery. While there is no success story yet to demonstrate this, with a clever combination of easy to use technology and good execution, we will witness a few success stories in this space in the coming years.

Online tuitions for school students we believe, is also catching up and scaling up is relatively easier. The nay-sayers can use statistical data about broadband penetration being low, but the absolute number of students using internet as a source of knowledge has gone up and there are only a limited number of tuition/coaching providers who are catering to them through the blended model.

4. Vocational Training: Nasscom and every other survey on the formal education system in India highlights the huge gap between employability and skill levels graduates in India possess across sectors. Be it IT, retail, financial services or BPO, companies spend huge amounts on training to make graduates productive after hiring them. The NIIT’s and Aptech’s have to a certain extent been successful in addressing the needs of the IT industry over the years. However, from English language training to financial analysis skills, the gap is still huge for the vocational training market.Recently, classroom based programs in English language training, BPO, Retail training, etc have been scaling up and have attracted investments as well. However, our hypothesis is that just like in the Tutorial/Test Prep space, a pure brick and mortar model will have scalability issues. A blended model with contact centers and online delivery (either web based on through VSAT networks) is more likely to scale up. Moreover, vocational training firms are now looking to tie up directly with universities and offer courses to students, which is also an interesting model to watch out for.Companies that have a placement services background seem to be in a better position here, including Edserve (recent IPO); nevertheless, the question of ‘recognized’ certifications needs to be addressed.

5. E-learning technology and content development: Within the outsourcing space, Indian companies have developed capabilities in development & consequently implementation of E-learning initiatives plus learning management systems (LMS) for corporate clients as well as educational institutions. The development and conversion of content for publishers & educational institutions, especially for the US market is also an opportunity that a few Indian companies like Excelsoft have targeted very successfully. These services are rendered mainly by small to mid size companies, but some of the big software vendors have strengthened these verticals lately. This space continues to be fragmented and smaller players may find it difficult to scale. However, mid sized players have high margins and good expertise and are well positioned to make inroads into markets outside theUS. We believe mid sized players in this space present a low risk investment opportunity for PE funds.

The sectors discussed above are not exhaustive; however, a majority of deals one is likely to see in the education space will fall into one of these buckets. As in any investment, the quality of the management team is probably the most critical factor, apart from the market opportunity they are addressing. For more information on education sector opportunities and interesting companies in the space, please contact Aravind G.R ( or Deepak Srinath (

%d bloggers like this: