Co-head of management consultancy firm Parthenon‘s education practice, Karan Khemka gives insight into private equity investment in international education– an industry he says is only beginning to bloom.
The PIE: What’s been your latest project?
KK: I co-oversee the education practice with two other partners so I’m rarely involved directly with any one engagement. Because I’m based in Singapore I’ll do a bit more in South East Asia or Australia. I have a weak spot for Latin America. It’s a very global practice- just to give you an idea, last year we provided transaction support to the eight largest education deals that happened on the planet worth about $2.6 billion of investment capital. The largest deal was in Brazil, an $830 million deal where Pearson bought an English language teaching company.
Last year we provided transaction support to the eight largest education deals that happened on the planet worth about $2.6 billion of investment capital
The PIE: In general what does Parthenon do for investors?
KK: Mostly for private equity or corporate investors, we provide commercial diligence support. They look at an asset such as a school chain or university or English language school or tutoring company or education technology company. And they’ll want us to look at the company and use our analysis and data and put together a transparent analysis to show whether or not the management’s growth plan is attainable.
The PIE: What do you look at in your analysis?
KK: It depends on what kind of asset it is. Let’s take a private school- the most important thing to understand there is the local demand. A lot of people open schools on very superficial numbers, things like Brazil has these many kids and there are more coming or India has more school-aged kids than the rest of Asia combined or whatever. We come back and say that doesn’t help you at all. With schools you have to go ultra-local and focus on distance, in a very granular way you have to adjust for price point and curriculum. A lot of people don’t go through the effort of doing that but enrolments are largely predictable if you do the analysis right.
The PIE: And how is your approach different for someone who is looking to establish a private higher education institution or a language school?
KK: For universities what matters less is the catchment area as people tend to travel for a four-year university. For universities what matters much more is its ability to put its graduates into good jobs.
For English language teaching people obsess about the efficacy of it. But the reality is nobody knows why some adults can learn a new language and why some cannot but you can still build a great business around providing students with a great experience- they make friends, they feel good about themselves just for the fact that they tried.
Nobody knows why some adults can learn a new language and why some cannot but you can still build a great business around providing students with a great experience
The PIE: How does Parthenon make money?
KK: We’re a traditional management consultancy. It’s fees for time. There are rare circumstances where we will have a success-fee based compensation model– those are cases where the client makes us responsible for results but empowers us to make changes in their company.
The PIE: How do you measure success?
KK: Typically the project is timed so that the advice comes before an enrolment cycle so you can see if the number of enrolments are up for example. In that sense it’s an industry where you have a fair amount of accountability for what you do because it’s a steady industry- everyone has to go to school. Depending on the enrolment cycles you should be able to see outcomes within a year.
The PIE: How did you get into the sector?
KK: I wish that the story was I always dreamt of being a management consultant in the education sector but quite frankly when I joined Parthenon I didn’t even know they had an education practice. When you start out in management consulting you think the adrenaline lies in the billion dollar M&A deals with giant automotive companies, but then I did a couple of projects in education and because I was based in London I started to become the go-to guy for non-US education projects. I slowly began to understand it.
Education is the stuff of growth- personal growth, social growth, national growth
There are thousands of management consultants out there working in bottled water or brake parts or whatever. The world economy absolutely needs all those things but education is the stuff of growth- personal growth, social growth, national growth. It is much more transformative than having access to electricity or good roads. But there is a chronic undersupply of education in most of the developing world. It’s great fun being in the sector because we help build big education companies and we feel that in its own small way that is helping create change in the world.
The PIE: There’s a healthy debate in the industry around for-profit education. What’s your argument?
KK: Coming from India I know how phenomenal education can be in a person’s life but in the beginning I was sceptical of companies or universities making money on education. And then what got me to be passionately on the for-profit side was the realisation that everyone makes money in education. The electricity company makes a profit, the facility maintenance company, the publishers who provide books, the people who sell school uniforms, the company who built the school building, the teachers, I hope, make a profit. The real question is: is the institution accountable to the student? In the end the successful investors and operators in education are the ones that produce results for their students and everybody is making money. The president of Harvard lives really well.
Everybody who is providing good outcomes has a place in the sector
The PIE: As private equity begins to flow into the sector, what role will smaller operators have?
KK: We are in the beginning, this isn’t an industry that has played out. The ten biggest university companies in the world together would have less than a 1% market share of global market. Everybody who is providing good outcomes has a place in the sector. It’s notoriously difficult to scale up because you can’t have one school in one area with 20,000 students. So I don’t think there is an end-state where five education companies enrol even 10% of the kids in the world. But I do think that there is an opportunity for many very small companies to triple in size.
There was a time when you were a small English language school or university who would buy you? That era is gone. Now you have private equity funds who are dying to put money in, you have large school and university companies that can roll you up. Just make a quality product and sell it.
The PIE: What do investors look for in schools?
KK: They want to see if a school has a predictable pattern of growth. What they don’t want is enrolments up one year and down the next. And they want to see that the school has been run with longevity in mind, that it retains its students and does good by them.
The PIE: What trends do you see in the international education sector?
Investors want to see that the school has been run with longevity in mind, that it retains its students and does good by them
KK: We have to separate out developed countries and emerging markets- because they’re totally different stories. Western Europe and North America are wrestling with education systems that are bloated and just expensive. In the US a typical liberal arts college or private university has reached a state where the cost is one hundred dollars per hour per student.
In the emerging world, there are pockets of exception, but in most of it there’s just not enough education. 2011 was the first year that total investments in emerging markets exceeded total investments in developed countries. That means on balance, risk adjusted, emerging markets are expected to be the engine of growth for the world. To live up to that hype, they’ve got to crank out skilled people.
Maybe in emerging markets we can develop a new system of education that can bypass this pathway of a hundred bucks per kid per hour. I hope so. But we aren’t there yet. Right now, more is good.
