Deal focus: CLSA CP school deal breaks new ground

Attempts to capitalize on Japan's ageing population so far have been relatively short-sighted, typically focusing on geriatric medical businesses, senior lifestyle trends or automation advancements that could help offset a declining workforce. Less attention has been paid to the longer-term strategy of investing in the country's shrinking ratio of children - the group that will actually have to cope with the biggest challenges of depopulation in the decades to come.

CLSA Capital Partners (CLSA CP) feels it has embraced this opportunity by making what is believed to be the first-ever PE investment in a Japanese cram school. These specialist extracurricular facilities represent a profitable business model in a country where competitiveness in high school and university admissions procedures can be notoriously intense. But so far, the traditional and fragmented nature of the sector has made it difficult to penetrate.

"Education has been regarded as a sacred business in Japan, so it's been in a highly protected business environment," says Keisuke Shitomi, a senior associate at CLSA CP. "Founders are still reluctant to utilize PE firms or other financial sponsors, and even to pass on their CEO positions to the next generation. We believe this deal could serve as a breakthrough in the education services industry."

The deal in question involved CLSA CP taking a controlling stake in BC Ings, operator of 68 cram schools at the elementary, junior high and high school levels. It employs about 180 staff and reported JPY3.5 billion in sales for the 2015 fiscal year. Revenue has increased at about 10% a year for the past 30 years.

The investment was made through CLSA CP's $210 million Sunrise II fund, which targets buyouts with enterprise values of JPY5-15 billion ($46-138 million). BC's operational policies and management - including founder-CEO Hiroki Tanaka - are expected to remain in place.

The firm's value-add plan is expected to focus in part on aligning a broader offering of academic services with new government initiatives aimed at diversifying curricula nationwide in fields such as computer programming and English. This approach will mainly target junior high schools and high schools.

Efforts to increase cash flow will also include an expansion of BC's school portfolio into new geographies, albeit with a continued emphasis on the key Hiroshima and Okayama regions. These industrialized, middle-class markets are characterized by relatively higher cram school enrollment and shaped by socioeconomic drivers that suggest some of the best prospects for growth in this space.

"The percentage of children going to cram schools has been successfully - and surprisingly - increasing for the past few decades," Shitomi says. "While the general population is declining, education for the younger generations is becoming the top priority for parents, particularly in education-minded areas such as Hiroshima and Okayama prefectures - so this is one of the few areas we think is growing regardless of the demographic trend in Japan."

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• Topics
• North Asia
• Consumer
• Buyouts
• Japan
• CLSA Capital Partners
• Education