AVCJ Awards 2019: Operational Value Add: EuroKids International

On selling Indian education services provider EuroKids International to KKR last August, Gaja Capital not only walked away with a 5x gross money multiple, but also a ringing endorsement of its transition to a buyout strategy that began six years earlier. For the bulk of its first two funds, the GP focused on growth capital deals. EuroKids was the last deal from Fund II and the first in which Gaja had singular control of a business.

“We had started to offer high touch engagement, or active engagement, to some of our portfolio companies, including RBL Bank, TeamLease, and John Distilleries,” says Gopal Jain, a managing partner at Gaja. “With EuroKids, we thought we could take active engagement to another level. We had the opportunity to invest in this company more as a classic buyout investor with a high touch engagement and take it from point A to point B.”

It should come as no surprise that the test case involved an education business. Over its 15-year history, Gaja has primarily focused on three sectors: education, financial services, and consumer. The first of these represents the largest cluster, with the broader education and employment space accounting for seven out of the 20 platform investments the firm has made to date. Early age and K-12 services have featured strongly in six of those deals.

The firm incorporates four key categories into its sourcing framework – economy, industry, business, company – and the starting point is often societal change. Within education, the overriding trends are urbanization, the breakdown of joint families into nuclear families, and the changing role of women within the home. In short, there is a growing population of young families in India’s cities, and the traditional at-home care providers – grandparents and mothers – are not as accessible. In Gaja’s view, this amounted to a compelling case for private early-age education services.

“By 2012-2013 it was clear to us – and it has since been further validated – that there is a huge addressable market and pre-school is an exciting place to be,” says Jain. “Traditionally, only a small portion of Indian kids have taken pre-school education, which covers pre-care education, playgroup and nursery, or the two years before children reach the age of four. But that was changing.”

Know your market

Gaja’s knowledge and networks within the education sector were also integral to the sourcing of EuroKids specifically. Unusually, the company was already more than a decade old and had been through a couple of ownership changes when it emerged as a viable target. The Egmont Group, a Denmark-headquartered media corporation established the business in 1997 as a publishing joint venture with local counterpart Indian Express. EuroKids then built a network of more than 100 pre-schools before Egmont and Indian Express exited through a management buyout in 2006.

Around 2007, the company needed growth capital and Educomp Solutions took a 50% stake for $8.8 million. Jain was a board member of Educomp at the time – he stepped down in 2010 – and became familiar with EuroKids. The goal was to double the EuroKids network of 1,000 pre-schools. However, by 2013 Educomp was in difficulty and looking to shed non-core assets. Meanwhile, two of the four individuals who led the management buyout seven years earlier wanted to exit.

Gaja teamed up with the other two executives – Prajodh Rajan, the youngest of the original four, ended up becoming CEO – to acquire the business. The private equity firm paid INR2.2 billion (then $40.3 million) for an 80% interest, taking out the existing investors and committing primary capital. Partners Group and one other LP co-investor contributed about one-third of the total.

“It was a very collaborative effort to consummate the deal,” Jain explains. “There was a sell-side advisor, so sellers were looking for the best price, but we had worked ourselves into a position where we were the preferred buyers.”

The private equity firm had a clear idea of what needed to be done from a strategic and operational perspective and set an ambitious target: put EuroKids on track to become a $1 billion business by 2025. The assumption was that, if the company could achieve its milestones, an exit route would present itself. While this proved to be correct – during the six-year holding period, revenue and EBITDA increased 4x and 10x, respectively – getting there required perseverance.

EuroKids was already India’s second-largest pre-school player with approximately 50,000 students across 600 establishments as of March 2013. The company entered the K-12 space in 2009, but progress had been tentative, with eight schools and 2,000 students. Gaja wanted to build out the K-12 presence, in both mass prestige and premium segments, but this needed to happen in lockstep with a significant repositioning of the brand and business model.

Firstly, certain verticals and geographies were unattractive. EuroKids generated 17% of its revenue from publishing in 2013. The board discontinued operations, deciding it was better to focus solely on schools than get distracted by the low-margin, working capital-heavy teaching materials business. Similarly, the company’s pre-schools in the Middle East, though accounting for a relatively small portion of revenue, were consuming a lot of management time and bandwidth. They were sold off.

With India-based schools at the heart of the strategy, Gaja focused on improving delivery. For instance, franchisee expansion in pre-school segment and the opening of new K-12 schools were halted in favor of driving utilization. Steps were then taken to improve engagement with franchisees, giving EuroKids greater oversight on teacher recruitment and training, which led to improved take rates and reduced franchisee churn. The company also started clustering pre-school and K-12 establishments in the same geographical catchment areas to enable flow from one to the other.

Another significant move was the adoption of a capital-light model in the K-12 segment. Traditionally, education companies in India own the properties in which they operate, an approach that can leave them exposed to a high level of risk. Gaja’s view was that the real value lies in the product, not the underlying infrastructure, so new schools were set up on leased premises.

New investments were made carefully, following the same product-first principles. EuroKids emphasized child safety and learning outcomes, partnering with Bureau Veritas to create safety protocols for schools and mandating Educational Initiatives to assess student performance. Various initiatives were launched to improve learning outcomes, including individual mentoring, and it contributed to better examination results.

Buying scale

The policy of cautious spending and operational improvement meant that EuroKids had cash at its disposal when the time came for M&A-driven expansion. “We chose a mode of growth that didn’t consume a lot of capital – growing in an asset-light way was a huge call – and so the company became progressively more profitable,” says Jain. “By 2015-2016 we had significant cash on the balance sheet. That gave us the confidence to acquire a business because we knew it wouldn’t stress the core business. EuroKids is debt-adverse and it is debt-free.”

With the existing management team focused on developing pre-school and K-12 services in the mass prestige segment, Gaja decided to acquire a ready-made premium offering. The private equity firm took the lead in identifying the Kangaroo Kids and Billabong brands – the former is pre-school and the latter K-12 – as a target and then negotiating a deal. This involved convincing the founder of the 20-year-old, independently owned company that an acquisition would be best for the business.

The founder was exited over an agreed period and Kangaroo Kids and Billabong were integrated with EuroKids. The acquired brands contributed 21% of group-wide revenue in the 2019 financial year and 17% of EBITDA. The deal closed in 2017, the same year that EuroKids launched its daycare service and completed a revamp of the EuroSchool K-12 brand. It was also when Jain felt he could say with confidence that the company was on course for a $1 billion valuation.

“The company met its budgeted EBITDA and reported 95% of budgeted revenues,” he explains. “By this time, the pre-K segment was adding more than 2x the number of franchisees per year at half the annual churn. In parallel, the franchisee take-rate had more than doubled to nearly a third of system revenues, and the child safety measures were rolled successfully out in all the schools. The KKEL acquisition was complete and with the integration well underway stewarded by the new leadership, the K-12 business was now more than 85% utilized with strong free cashflow.”

The exit was triggered by inbound interest from an unnamed private equity firm. In March 2018, Gaja began discussions with investment banks about its options and one was hired to conduct a competitive evaluation process. Multiple private equity firms submitted bids, and the sale to KKR was consummated in August 2019 following extensive due diligence.

EuroKids now has 85,000 students enrolled in 1,100 pre-schools, while the K-12 business has grown to accommodate 28,000 students across 37 locations. It remains one of India’s leaders in pre-school and now ranks in the top three for K-12, with that segment accounting for 50% of EBITDA.

This evolution is in line with global norms. The US has already experienced consolidation, with the five largest pre-school players enjoying a combined 65% share of enrolments among branded establishments. EuroKids was already gaining ground within a highly fragmented market when Gaja invested. The private equity firm was able to ride this wave of change in pre-school and channel the effects into K-12 by creating a cohesive network in terms of geography and product quality.

“Our exit thesis was premised on the creation of a leadership platform of scale that could be an attractive acquisition candidate for a large buyout firm. The priority then became to scale the company while delivering on significant operating leverage and embedding capabilities suited to further consolidation in the market, making it attractive for future investors to harvest further growth,” says Jain.

Putting in place talented management that could handle complexity and scale was a crucial part of the process. Gaja recruited an entire senior team under Rajan, including a CFO, chief human resources office, CMO, business heads for pre-school and K-12, and school principals. The company requires much less financial engagement than in 2013, which meant the new owner – whoever it turned out to be – could concentrate on broader development initiatives.

People power

Perhaps just as interesting is how Gaja evolved during the holding period as well. Five executives, three from the investment team and two operating professionals, engaged with EuroKids on a weekly basis, devoting the equivalent of around 150 days a year to the company. No strategic consulting firms were involved. When gaps needed to be plugged, this was done internally: for example, operating partners fulfilled the HR and CFO functions before permanent hires were made.

The private equity firm is currently deploying its third fund, which closed at $240 million in 2016, and the buyout philosophy is well established. Prior to the EuroKids acquisition, some operating capabilities were in place, but they have since become far more pronounced. Gaja has a team of 12 full-time investment professionals and seven part-time operating partners. Half of the investment team are drawn from operating backgrounds and have strong operating responsibilities.

There are already more opportunities to put this expertise to work. When Gaja was founded in 2005, India’s private equity market was worth $2 billion a year, and buyouts accounted for 5% of deal flow, according to Jain. It has since grown to $30 billion and the buyout share is 25%. He predicts the $100 billion threshold will be crossed within 10 years, with the proportion of buyouts rising to 50%. EuroKids reflects a theme within this theme: global private equity firms seeking to acquire assets that have been developed – in a minority or majority context – by existing financial investors.

“Over a 10-year period, our sectors haven’t changed and our position in the sub-$100 million enterprise valuation space hasn’t changed, but we have evolved into a high-touch buyout investor. The build-up has been almost entirely on the operations side,” Jain adds. “It’s not unique – it’s a standard template for a buyout firm. We were probably ahead of the curve, but we are convinced that high-touch, control investing in the lower middle market has arrived and will grow significantly as the Indian PE market matures.”  

Pictured: Alvarez & Marsal's Oliver Stratton (left) with Ranjit Shah (center) and Imran Jafar of Gaja Capital

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• Topics
• South Asia
• Consumer
• Trade sale
• Gaja Capital Partners
• KKR
• Education
• Operating partners
• AVCJ Awards
• India