‘Non-profit only’ rule hinders private equity in education

Are archaic laws preventing the quality of education in India from rising?

It would seem so from the results of a survey conducted by ‘Venture Intelligence’, an information aggregator for institutional investors. According to it, policy ambiguities are preventing many funds, especially those based overseas, from investing in the $40 billion Indian education sector.

“The level of interest, when we did the survey, was tremendous,” Arun Natarajan, MD & CEO of Venture Intelligence, said.  “About 81% of the 90 private equity firms we surveyed were interested in investing in the Indian education sector, but 55% also felt that regulatory ambiguity is a significant deterrent to actually doing so,” he said.

The cumulative private equity investment into the education sector has been a minuscule $300 million. Compared to this, India has been seeing an annual PE investment in the range of $10 billion in recent years. While the total investment may have been just $300 million, according to brokerage CLSA, education spending in India is above $40 billion per year.

Moreover, spurred by the increasing popularity of private schools offering better facilities, the market will be growing at an average rate of around 16% per year, according to the brokerage.

The biggest regulatory stumbling block perceived by the investors is the legal requirement that schools should be run only by non-profit entities or trusts. “While some states, Haryana and Maharashtra for instance, allow for-profit schools, both the state and central school educational boards, to which almost all schools are affiliated, specify that they will only approve schools owned by non-profit bodies,” said Dushyant Singh, director for transaction services at KPMG.

Like most regulatory hurdles, many Indian companies get over the issue by forming a trust and getting most of the work ‘outsourced’ to the actual company. But, Natarajan said, many foreign PE firms are reluctant to invest in policy-ambiguous sectors, forcing even early-stage education companies such as Educomp and Everonn to tap the public market.

“Education is the last major sector which is yet to be liberalised... Like real estate, which saw an investment inflow of $9 billion in the first year itself when it was opened up in 2006, the floodgates will open if the government removes the legal ambiguities,” he said.

This has not prevented some of the private equity players from trying to nibble at the market though. Akhil Shahani is a partner with the recently announced, $150 million Kaizen Education Fund, which confines itself to relatively non-regulated areas such as vocational training and internationally affiliated schools. “We realise that there is a big opportunity in schools and colleges. But we would prefer to invest in areas where the laws are clear,” he said.

The space, however, seems set to see more action. Milestone Capital and Religare Venture Capital joined hands earlier this month to launch a Rs 600 crore fund dedicated to the education and healthcare sectors only.