Australia education: Study your market

Australia's Study Group is a classic cross-border consolidation play. More than a decade ago, Australian Mezzanine Investments - predecessor to CHAMP Private Equity - bought Education & Training Australia. Three years and several bolt-on acquisitions later, the business was sold to the UK's Daily Mail & General Trust.

In 2006, Daily Mail deemed the business, now called Study Group, to be non-core and put it up for sale. CHAMP Private Equity acquired it for $157 million and continued the earlier expansion plan, notably forging partnerships with universities and offering special training services for international students about to study abroad.

Four years later, Study Group was bought by Providence Equity Partners, a global PE player with a specific interest in education, for $570 million. By this point, the company had more than 55,000 students at 38 campuses in four countries. Study Group's bolt-on spree continued last year with the purchase of ANU College, which provides English language and pathway courses for Australian National University.

The development of Study Group underlines the potential of tertiary education, driven by demand from emerging markets like Asia, where the nascent middle classes want to send their children to university in the UK, US or Australia.

"There is recognition that Australia's international education sector is poised for further growth given the high quality education available, favorable visa entitlements for students, graduate employment opportunities and Australia's geographic proximity to Asia," says Simon De Young, a partner at Baker & McKenzie, who worked on several Study Group transactions.

Indeed, Deloitte identified international education as one of five sectors - alongside gas, agribusiness, tourism and wealth management - that could contribute an extra A$250 billion ($220 billion) to the economy over the next 20 years.

However, the sector isn't seen as a sure-fire success for PE entrants. Most tertiary education in Australia is well-funded by the government, and given the consolidation that has gone before, few privately-owned providers are available that capture the international market. Moreover, without the experience and global coverage of a Providence, PE players might not be able to guide companies at this stage of growth.

Rather, investors would be better served focusing on industry niches at the other end of the consolidation gauntlet. Vocational education and early learning are routinely cited as areas that are still highly fragmented.

Policy driven

Vocational education and early learning are also segments in which private equity investors may find the regulators on their side. The regulatory hurdles on the tertiary side, particularly for higher education or pathway programs leading to undergraduate study, are seen as particularly high.

Growth could depend on building strong relationships at government level.
"Education is a highly regulated sector and developing government relations is very important," Arvid Petersen, CEO of Study Group, told the Australian Private Equity and Venture Capital Association (AVCAL) earlier this year. He noted that CHAMP facilitated an introduction to former New South Wales Premier Nick Greiner as part of these efforts.

Tax is another concern. In Australia, privately-owned tertiary education providers have to pay payroll tax to the government. They try to avoid this by registering as non-profit organizations, which can also open up the way to state funding. About 80% of tertiary education players are now non-profit, which inevitably makes them less attractive to private equity.

Vocational education and early learning, however, are full of private players, with the vocational market alone said to be worth A$8.4 billion. They also have strong policy support.

The government wants to boost productivity and enlarge the tax base by encouraging parents go back to work. To achieve this, it is increasing funding for childcare. Properly structured vocational training players can also expect to draw upon government funding to support growth. If consolidation is a natural consequence of this rapid growth - operators will seek to exploit economies of scale and establish standardized, industry-leading practices - compliance is another contributing factor.

"Compliance requirements for vocational training organizations are rising, which will make it more difficult for smaller players," says one GP. "We do see opportunities for consolidation."

Building scale

According to Thomson Reuters, there have been 11 M&A transactions worth $568 million in Australia's education services sector so far in 2014, a four-year high. It is broadly comparable to the 2013 figure but more than 12 times larger than the combined total for 2012 and 2011.

The most active buyers are either publicly traded or PE-invested. Last month, G8 Education, the largest listed childcare center operator, issued A$60.1 million in shares to fund the proposed acquisition of 29 childcare and education centers. Another listed firm, Affinity, has completed three rounds of bolt-on acquisitions in the childcare and education space in the last 10 months, spending approximately $100 million.

Meanwhile, pan-regional PE firm Navis Capital Partners paid A$120 million to acquire the second largest player - Guardian Early Learning Group - last December. The seller, Wolseley Private Equity, had helped build Guardian's network to 74 centers but as a domestic fund there was only so much more it could do.

"You can build small groups of centers with small private equity funds. But once you reach a certain size, you need to find bigger funds. So it's natural for companies like that to be sold through a secondary market," says Philip Latham, a partner at Navis.

The same phenomenon exists in the vocational space. Also last year, domestic GP Anacacia Capital formed Careers Training Group (CTG) through the purchase of two vocational education companies. CTG is said to be looking to complete a string of acquisitions as it seeks to emulate the success of the likes of Navitas and Vocation, both of which are now listed.
Baker & Mackenzie's De Young adds that vocational training has been the most popular segment of the education sector in terms of transactions over the last 18 months.

"Historically, vocational training in Australia has been focused on educating domestic students rather than international students. However, with a rising middle class in Asia, it may be that a rising proportion of new students enrolling into local vocational education programs come from Asia, which could provide further impetus for growth in the sector," he adds.

Expansion does not just have to be domestic, although as previously mentioned a PE firm with a global network is best positioned to take companies offshore. Guardian, for example, now has 85 centers in Australia and Navis plans to buy 10 more in other markets. The pace and size of acquisitions is likely to be measured, initially focusing on smaller operators in order to understand how different markets work.

Going overseas brings exposure not only to contrasting regulatory regimes, but also varied economic environments. For example, lease rental is about 20% of the operating costs for a center in Australia and the minimum contract tenure is 10 years, with the option for a 10-year extension. In Singapore, costs are much higher but the leases could be as short as three years.

And then the tax breaks so readily available in Australia may not be replicated overseas. "If you look at Singapore, the market is so different," Latham says. "Taxes are low and there is no great advantage for parents to be looking for tax-driven incentives. In Australia, if you can get a tax rebate that's a big incentive."

 

SIDEBAR: Infrastructure angle

Non-profit education providers do not represent an attractive proposition for private equity, but the public-private partnership (PPP) structures used to develop premises for these providers can be appealing to a certain kind of investor. AMP Capital is very keen on this space.

The AMP Capital Community Infrastructure Fund, which invests PPP social infrastructure across healthcare, education and other assets, has already backed five education projects. Recent deals include the acquisition of a 100% interest in The Partnreships Victoria in Schools Project, a portfolio of school buildings in Melbourne, from Royal Bank of Scotland (RBS).

Julie-Anne Mizzi, the fund's investment director, says the relatively low risk and potentially high-yield returns of education PPP assets could be attractive to pension funds or investors with a strong line in environmental and social governance (ESG).

"Some PPP assets have a proportion of revenue from non-availability-based payments. For example, in the healthcare sector, a proportion of revenue may come from car parking or retail. However, education PPP projects generally provide investors with a 100% availability-based revenue payments, which mean all revenue will come from the government. Therefore, they have a lower risk profile," says Mizzi.

Social infrastructure in Australia has yet to gain traction with foreign investors. Firstly, it requires strong relationships with government and putting people on the ground to be involved in operations. Secondly, deal sizes can be quite small compared to traditional infrastructure projects.

Nevertheless, GIC Private is tapping real assets opportunities in the education sector. This year the sovereign wealth fund teamed up with Macquarie Capital to form a joint venture that has acquired a majority stake in an Australian student accommodation operator. The investment rationale is that the increase in international student numbers has not been met with an equivalent increase in accommodation supply.

AMP also targets this area and has set up a fund specifically to invest in student accommodation. "Student accommodation is less regulated compared to school PPPs. It is a commercial agreement the investor reaches with the university rather than with the state government," Mizzi says.

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• Topics
• Australasia
• Buyouts
• Australia
• Education
• Navis Management
• CHAMP Private Equity
• Anacacia Capital
• AMP Capital Investors
• Infrastructure
• M&A
• buyout