19 May 2010 | By: Mohamed Hairul Borhan

Education has emerged as one of the most lucrative sectors in India and many private equity investors are lining up to invest in the US$80 billion (S$112.5 billion*) industry.

Numbers crunched by education-focused private equity fund Kaizen Management Advisors showed that venture capitalists and private equity players have pumped in excess of US$140 million so far this year, 50 per cent more than what they invested in the whole of 2009.

“We feel the education sector offers tremendous growth potential and is poised for rapid growth in the next few years,” said Ramesh Venkat, chief executive for Reliance Equity Advisors, a private equity arm of Reliance Capital, which entered the segment a few months ago by investing about Rs100 crore (S$30.1 million*) in Pathways World School, a primary and higher secondary school.

The total VC/PE investment into the sector is expected to be close to US$300 million this year, said Sandeep Aneja, managing director for Kaizen Management Advisors. Dhanraj Bhagat, partner at research firm Grant Thornton, said investments into education will grow 40-50 per cent every year.

There are currently about 25 PE/VC players in the market that are actively looking for good deals, and about ten deals have been signed in the last few months.

Last week, US-based VC firm Foundation Capital made two back-to-back investments - Rs31 crore in Tree House Education , a company that operates in the preschool and K-12 category, and Rs20 crore in Aspire Human Capital Management, a Gurgaon-based employability enhancing firm.

“We are interested in investing in large markets which have scale,” says Ashu Garg, a partner at Foundation Capital. “It is estimated that about 70 million young Indians suffer from employability skill mismatch.”

Lack of regulation in K-12 (kindergarten to class XII) segment and supplementary education has made education attractive for investors. “Sectors such as vocational training, supplementary education, pre-schools , ICT and content are appealing as these are relatively immune from regulatory uncertainty,” said Raja Parthasarathy, managing director for IDFC Private Equity.

Matrix Partners India too has invested Rs59 crore in Tree House in two tranches - Rs50 crore in 2008 and Rs9 crore this month. Rajesh Bhatia, chairman and managing director for Tree House Education, declined to reveal the stake of PE firms, but said the promoters have more than 51 per cent stake in the company.

Tree House runs 135 pre-schools across the country and has expanded in the K-12 segment in the last 18 months. It runs the schools under a management contract. The pre-school segment is worth US$2 billion but is growing at an annual rate of 40-45 per cent, according to Rishi Navani, co-founder and managing director for Matrix Partners.

Matrix Partners last year invested Rs100 crore in FIITJEE, a coaching institute focused on training for IIT entrance exam. The engineering coaching business market is worth Rs10,000 crore, said Mr Navani.

The education sector began heating up in 2005. Although the deal sizes in the sector are much smaller compared to sectors such as infrastructure, the PE appetite for the industry has increased rapidly. Perhaps the biggest deal till recently was IDFC PE's Rs135-crore investment in Manipal Education in September 2006.

It was surpassed this February when Manipal Education raised a second round of funding of more than Rs190 crore from Premji Invest.

The most active segments in the industry are education technologies and test preparation segments, which have attracted considerable interest since 2008.

*Exchange rate correct as of 21 May 2010

Courtesy of IBEF