Growing sector estimated to double business to $1 billion in 2 years.

Rishi Navani, co-founder and managing director of Matrix Partners India, says what the organised retail sector went through in the past five years, education will go through in the near future.

Navani should know. His investment firm with Rs 1,500 crore of assets under management, has invested Rs 59 crore in Tree House Education, a pre-school and K-12 education entity. The investment was done in two tranches — Rs 50 crore in 2008 and Rs 9 crore recently. Last July, Matrix Partners India had also invested Rs 100 crore in FIITJEE, a company which helps students prepare for the IIT-JEE test, crucial for seeking admission into top engineering colleges. Matrix is closely watching the space for future investments.

Another key investor in Tree House is the US-based Foundation Capital, which has over Rs 11,000 crore of assets under management. It invested Rs 31 crore in Tree House Foundation Capital had recently invested Rs 20 crore in Aspire Human Capital Management, a Gurgaon-based employability-enhancing firm.

“Not much attention has been paid on the importance of pre-schooling in India. However, we want to focus on this age group. The capital raised would be used for expansion,” said Rajesh Bhatia, chairman and MD, Tree House Education. Tree House currently operates 135 pre-schools. It also takes up management contracts and currently manages 12 schools under the K-12 brand.

More and more pre-schools or play schools are looking at private equity funding to expand. Sources say other players in the industry that are in talks with PE funds include Kangaroo Kids Education (KKEL), Hyderabad-based DRS Kids and Zee Learn.

While KKEL’s founder and chairperson, Lina Ashar declined to comment on the funding her company was seeking from the PE players, she agreed it’s important for expansion and growth.

“We are looking at active expansion across the country, especially the northern and western regions. In the next three years, we are aiming to set up around 25 Kangaroo Kids and 25 Billabong High Schools in Tier-I cities and key metros. We are also looking at building our overseas presence; expanding into developing countries that have a similar cultural/demographic make-up like India. We also plan to have about 25 teacher education institutes, considering the huge unmet demand for good quality teachers,” said Ashar. At present, KKEL has around 57 Kangaroo Kids franchisees.

The pre-school segment, according to the Kaizen Education Report, released by Kaizen Mgmt Advisors, is worth an estimated $500 million as of now and is expected to grow to $1 billion in the next two years.

The sector is growing at a compounded annual rate of 30 per cent. This growth is led by low penetration (one out of 100 children enrolled), of the 119 million children between the ages of 0 to 4.

“Growth of the sector is also led by low penetration (one out of 100 pre-school aged children enrolled) and corporate activity that has gathered pace. Increasing awareness among parents about the benefits of a quality pre-school education has been driving the penetration levels and price discovery in the segment. Led by these factors, the market is expected to expand over two-fold by 2012,” said the Kaizen Education Report.

The sector is highly fragmented, with 11 major chains, including KidZee, Euro Kids, Tree House, Bachpan, Mother’s Pride and Sunshine. Around 10 smaller players are also active in this space.

PE investment in pre-schools is also prompted by low regulations, low-entry barriers and weak penetration. PE players say the pre-school market is not regulated and there is a low upfront investment requirement to expand and establish a new branch, as rentals, which form the major part of expense, can typically be offset against monthly receipts and upfront admission fees.

In the past five-six years, the pre-school market has seen a shift toward organised players. KidZee (renamed Zee Learn) — India’s largest pre-school chain — has set up 623 pre-schools in just five years since inception and plans to add another 1,000 over the next two years.

Organised players have largely scaled up using the franchisee route — 1,700 schools catering to 200,000 students. While Kangaroo Kids is primarily a premium brand at an average annual fee of Rs 35,000-45,000, Tree House charges an average annual fee of Rs 18,000. Further, Educomp has launched a brand ‘Roots to Wings’ (60 pre-schools at present) and has also acquired a 50 per cent stake in Euro Kids (484 centres) for Rs 39 crore.

Hyderabad-based DRS Kids says it is in talks with PE players for possible fund raising, but refuses to divulge further details. “We are in talks with PE players for raising funds which would be used for further expansion,” said a company official. Zee Learn’s Chief Executive Officer Sumeet Mehta says while his company has not firmed up plans yet regarding fund raising, PE players offer easy finance for scaling up.

“Currently, there’s a lot of money chasing the education sector. Investment in pre-schools is likely to grow with importance to childhood education. PE players find pre-schools feasible to invest in, as there are very little regulatory issues involved,” says Mehta.

Source : BS

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