Education gets VC injection
Updated: 2007-10-29 10:41
It's the start of a new semester and Chinese schools are welcoming a throng of new students, many with MBAs and PhDs, who are not only looking for good teachers but also investment opportunities in China's booming private education sector.
In the past month, local education companies including Beijing-based Xueda Education and Ambow secured a total of US$123.7 million from venture capital firms, according to ChinaVenture, a Beijing-based researcher focusing on the nation's venture capital market. The investments accounted for about one-eighth of venture investment made in China, signaling a rising interest in the sector.
CDH Investments, a veteran venture firm, said in October that it paid US$10 million to buy into Beijing-headquartered Xueda Education Technology Co Ltd, a homegrown private school offering tutoring services for primary and secondary students.
In September, Ambow Education Group, an online education service, said it obtained a US$54 million from Macquarie Bank Group, the largest investment in the sector to date.
"Education is now one of the hot spots for venture investors as they are looking beyond the Internet for opportunities," says Gavin Ni, CEO of Zero2IPO, a local researcher on the venture capital market.
China's enormous student population is the easy logic behind the enthusiasm. Statistics from the Ministry of Education show there are 260 million students from primary through post-graduate levels in China.
"These students may need tutors, or want to pass qualification exams such as TOFEL or GRE, but there are no such courses available in public schools," says Ma Xuelei, deputy secretary general with Beijing Association of Non-government Education. "This leaves huge room for private education institutions".
This is exactly the path Xueda has taken. Established in 2001, Xueda now provides learning aids such as tutoring and tailor-made studies. The company also established China's largest database of tutors, which help match students and teachers on Xueda's website.
Xueda currently has more than 1,000 full-time tutors in its 30 outlets across the nation. With the venture funds it raised, the company plans to open three to five outlets each month to create a network of more than 100 outlets in 50 cities in the country.
"Xueda has achieved impressive growth over the past few years thanks to its innovative business model," says Wang Jun, vice-president of CDH. "The company's growth has demonstrated the enormous demand in the education market and the possibility for commercial success."
According to Wang, CDH studied investment opportunities in China's education sector for a number of years. The venture firm now manages US$2 billion and has invested in companies such as Singapore-listed Lining Sportswear and Hong Kong-listed China Mengniu Dairy Co Ltd.
"Education is a less risky sector for investment," says Le Wenyong, associate director of JAFCO Asia, a Japanese venture firm.
"You can charge first and provide services later, which means pretty good cash flow. And Chinese are particularly big spenders when it comes to education."
Industry insiders say the online education market will be a particular target for investors as it is expected to more than double to $21 billion globally in 2008, according to researcher IDC.
Shanghai-based research house iResearch estimates China's online education market will total 29.6 billion yuan (US$3.96 billion) in 2007.
Investor enthusiasm for the education sector was ignited in part by the New York listing of China's largest English-language training institution, Beijing-based New Oriental School.
Total student enrollment in language training and test preparation courses at New Oriental in the nine months ending in February, 2007 increased by 19 percent year-on-year to about 754,300 from some 633,600 in the same period a year earlier.
"New Oriental's initial public offering is the catalyst," says Wang Gongquan, partner of CDH investment. "Before 2000, no investor would look at local training schools."
The real change happened when New Oriental's listing raised US$112.5 million last September, bringing the education sector into limelight and giving venture capitalists the confidence to cash in on it.
Almost on the same day, Global IELTS School, China's second-largest commercial English-language institute, announced that it had secured a US$20 million investment from SAIF Partners. Later the firm said it plans a public listing in March 2008.
How many training institutions will make IPOs (initial public offerings) in the next few years is hard to predict, but Li Rubin, president of Xueda Education, says such schools take IPOs as a measure of success.
The US$20 million investment from CDH Investments will be used for Xueda's expansion and research and development initiatives. An IPO will be on Xueda's agenda in 2008, and expected to be completed in 2009.
"The entry of venture investors will lead to a reshuffle of China's private education market, and more New Orients will be created in the process," says Gavin Ni.
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