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MENA private providers and investors report “value gap”

Demographics, increased purchasing power and consenting government regulation have created a blooming market for private education providers and investors in the MENA region. According to Dubai-based investment bank Alpen Capital, the total number of students in the region is forecast to reach 13.7 million by 2020 with enrolments at private providers expected to grow 6.7% in that time.

"Great teachers are a diminishing resource"

However, interviews carried out by Informa, a global events organiser and market intelligence provider, shows a mismatch in operator and investor goals has resulted in low volume growth in capital transactions this year.

“Education is a long tail business and you can’t expect returns that you might be able to get at other industries at the same time frame”

Key operators in the industry attribute the gap to misalignment in values and long-term commitments from investors. “It depends who the third party investor is,” said Alan Diaz, Senior Vice President for Europe, Asia, Middle East and Africa at Laureate Education.

“If it’s someone who just wants in and out and cash in within a 24-month-period, then I wouldn’t accept investing with that person either, because education is a long tail business and you can’t expect returns that you might be able to get at other industries in the same timeframe.”

Riverston Group chairman, Michael Lewis, said the company was frustrated by constant ‘slipping and chipping’ by private equity partners with its London schools making the group reluctant to seek investors in its MENA expansion.

“We have made considerable progress but would like to find someone who has a genuine interest in both our education and business model which has a strong social purpose as well as assisting us in maximising investor returns over the next five years,” he said.

Meanwhile, PE firms find shifting governmental policy creates challenging operating environments and often educators don’t have clear growth strategies.

“Education is a hands-on business and most PE value add focus on financial engineering and cost cutting,” said Bernard West, Executive Director at Tadress Holdings.

Customer acquisition periods are limited mostly to just the beginning of the school year and limited hiring cycles for teachers also affect the sector’s liquidity.

However Don Lim, Executive Director at Al Masah Capital, said private education in the Middle East has been very profitable for the firm.

“Great teachers are a diminishing resource”

“It is true that there are comparatively less exits and listing in this sector, but it also means the demand for such an offering would be significant when an education opportunity of a suitable profile and size hits the market.”

Successful deals, he said, emerge when investors know the hands-on operational detail of the business and align their interests with owners, operators and managers.

Both investors and operators agree that the profitability of the industry is threatened by social unrest in the region and small recruitment pools of quality teaching talent.

“Great teachers are a diminishing resource,” commented Dino Varkey, Group Executive Director and Board Member at GEMS. “As a result, the cost related to attracting the best of teachers is increasing. In our case, the fact that we are attracting from a global talent pool adds to this challenge.”

Still despite a lag in deals, Alpen Captial’s GCC Education Industry Report released earlier this year says intrinsic factors including demographics will maintain the region’s momentum.

Vocational and online education are pegged as emerging sectors to watch

Vocational and online education are pegged as emerging sectors to watch.  Enrolments will continue to be dominated by primary and secondary segments thanks to the boom in international schools, but market share is expect to decrease slightly from 79% of enrolments to 76% in 2020.

The UAE is the most developed market in the region, led by Dubai’s meteoric rise as an academic hub. However, according to Informa Saudi Arabia, Qatar, Oman and Egypt are all attracting attention.

Both investors and operators are also beginning to look at less developed markets in Turkey, Morocco and Algeria where demand is increasing for quality education but there is less saturation from foreign players.

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