Everyone knows the value of a good education. For investors, there is also plenty of value to be reaped from investing in education. It ranks among the top 10 sectors globally in value, with a worldwide gross value added (GVA) of around US$4 trillion in 2019. With a compound annual growth rate (CAGR) of approximately 3 percent between 2009 and 2019, K-12 education (kindergarten through year 12) stands out for its stability and potential to offer healthy growth rates.
But is this potential applicable to Southeast Asia (SEA)? Those with patience, deep pockets and a willingness to navigate local market conditions could see returns of between 10 and 25 percent when they invest in the region’s international and bilingual K-12 schools, according to a new report by INSEAD faculty and students.
The appeal of education
The private education sector, in particular K-12 education, boasts characteristics that make them attractive “cash cow” investments. Like food and housing, education is seen as non-discretionary expenditure. As a result, revenue streams are steady and more resilient to fluctuating economic conditions. Adding to this stability is the fact that students spend up to 14 years at a K-12 school, ensuring predictable cash flows over an extended period.
Such stable demand gives schools strong pricing power, allowing fees to keep pace with, or often surpasses inflation. The fact that these fees are paid upfront has a positive impact on cash flow, while a relatively fixed cost base means margins improve with every additional student.
There are also high entry barriers. Beside the fact that schools need a strong brand to attract students, the prohibitive financial costs and strict regulatory requirements make setting up a new school a significant undertaking.
Considering these factors, it’s not surprising that education groups, either individual schools or groups of schools, is now viewed as the “new healthcare assets” resulting in hefty valuation expectations in recent years. This potential can be seen in global investors EQT’s recent $5.4bn exit from the education group Nord Anglia, purportedly making 4x on the deal for its investors.
Competitive landscape
SEA offers a unique appeal, though our report found education in the region to be an increasingly competitive and dynamic landscape. This growing interest is driven in part by its favourable economic and demographic factors. The simple fact is more people in SEA can afford to pay for high quality schooling, thanks to rising affluence, a growing middle class and increasing expatriate populations.
The high level of education offered at international schools often stands in contrast to public schooling options in many SEA countries, contributing to growing demand. A fact borne out by higher average assessment scores for private schools across reading, math and science compared to the public education sector. Finally, a desire to learn English or receive a bilingual education,…
Read More: The Benefits of Investing in Good Quality Education
