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Jaco Maritz | Africa PE News App | 23 Oct 2019

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Private equity firm Sanari Capital recently concluded a R28 million (about $2 million) investment in South African private education company Edulife Group, the largest independent school group in the Free State province. It currently consists of three schools (Academy of Excellence Primary, Academy of Excellence Secondary, and Vista Junior Academy), with a fourth school (Olive Ridge) opening in January 2020.

For more insight into the deal, Africa Private Equity News spoke to Samantha Pokroy, CEO of Sanari Capital.

Describe Edulife’s target market.

Edulife currently targets the Bloemfontein (the capital of Free State province) area. But what is interesting is that within Bloemfontein, its market spans multiple income groups. The Academy of Excellence primary and high schools provide affordable, but still quality, education to a very low income community. Then there is the Vista Junior Academy, which is situated in an emerging middle class area. And next year, the company will open the Olive Ridge school, which targets middle- to upper-income learners. This strategy helps to spread risk and tap different drivers of growth. We also gain operational efficiencies which enables us to cross-subsidize and offer educational and extramural offerings that the lower fee schools could not afford alone.

Is South Africa’s private education sector not very competitive?

It is certainly becoming more competitive, but it depends on the geography and the target market. There are some anomalies in the system. For instance, even at the upper-income level in Johannesburg, many parents struggle to find places for their children in good schools. However, some geographies and segments are most definitely going to become saturated and very competitive, which presents an enormous risk from an investment perspective, particularly in areas where property and development costs are high.

What we find very attractive about Edulife’s business, is that we believe demand will exceed supply for the foreseeable future. Especially at the lower income levels, where the public sector alternatives are currently not affording the same opportunity. As much as we hope that this situation will change, it is going to take a long time. We think there will continue to be a huge demand from parents to offer their children a higher-quality alternative, prioritising spend on education as a means of lifting the family out of poverty and investing in their collective futures.

How is Edulife able to run a profitable business by targeting low-income earners?

There are several factors, but the biggest reasons why the company is able to operate profitably, while still providing quality education, is because it shares centralised resources among its various schools and because the current schools are operating at full capacity. Schooling is most risky at the stage where it is subscale. And that is why starting a school is a much more risky proposition because you don’t have the base of students.

The property and the construction costs that we are able to achieve also afford us certain cost advantages that you may not get in other mainstream markets.

What was the motivation for Sanari’s investment in Edulife?

Sanari does not participate in competitive auction processes beyond an expression of interest. So we only invest if we are in an exclusive position beyond that point, or in deals that are proprietary to us.

Edulife was quite interesting because it came to us through a sell-side advisor, who was looking to raise capital for the CEO of the company to expand Edulife. We submitted an expression of interest and landed up in a fortunate position where the owner-CEO opted to partner with us on an exclusive basis.

We’ve looked at a number of investment opportunities in the education space. Prior to this deal, we have not invested in the sector, largely because of valuation expectations. We were pleased that this deal provided an opportunity to invest at a fair but reasonable valuation, as it was slightly under the radar and the owner-CEO saw that the value uplift really sat in front of us and through the partnership. So the stage and the size of the investment made it an attractive entry point for us.

As I mentioned earlier, the risk and the capital intensity of education investments are really when you are starting a school from scratch. With this investment, only one of the four schools is brand new. The cash generation from the other schools, therefore, de-risks the overall investment.

Another factor was Edulife’s very experienced and passionate CEO. I’ve never quite seen someone more purpose-driven and focused on the achievement of a vision than Hansie Engelbrecht, the current CEO and the son of the original Academy of Excellence founder.

How will Sanari’s capital be used? What are the growth opportunities for Edulife?

Our initial capital investment is being used to fund two new school premises – the one is for the new Olive Ridge school, and the other is for the existing Academy of Excellence, which currently operates from sub-optimal facilities. The new premises will bolster the school’s capacity and also provide much better resources and facilities.  At both the Academy of Excellence and Olive Ridge, we will also add boarding facilities, which is very much in demand from the surrounding areas. Furthermore, Vista Junior will be expanded to include a high school.

Beyond these initiatives, we want to expand into new markets. We have already identified locations where the dynamics are similar to Edulife’s current market. This would, however, require additional funding, which we would consider at that point in time.

What would be a likely exit avenue for this investment? 

A logical option is a sale to one of the various large school groups that are in existence, and currently emerging, in this space. I think Edulife’s market will be an attractive acquisition for one of these large school chains.

But I equally think the business has quite a long runway. Therefore, an exit to a large financial sponsor interested in taking the group to new markets is also an opportunity. We will evaluate these opportunities as we progress through the investment.