Private equity flocks to African education

Actis has joined a number of firms looking to take advantage of growing demand for higher education across the continent.

Private equity firms are being drawn to higher education in Africa amid growing demand for skills from the continent’s emerging middle class.

In July, growth markets investor Actis announced the addition of three universities across Morocco and South Africa to portfolio company Honoris United Universities, a network spanning nine countries.

It is not the only private equity firm targeting the sector. Development Partners International invested from its $725 million second fund in Université Privée de Marrakech in 2014, while global firm Abraaj Group has made two investments in Egyptian education providers since 2014.

“It’s a very defensive product,” said Rick Phillips, partner at Actis, of higher education. “Families will cut back on this as the last thing because it’s such a fabulous return on capital for them, putting their son or daughter through university.”

Excitement about the sector is palpable. “Driven by the demographics across Africa, where the pyramid of many young people compared to fewer old people still holds, the emergence of the middle class has helped drive demand for education,” Sofiane Lahmar, partner at DPI, told PEI.

“In francophone countries, the demand for French language higher education in particular has presented a significant investment opportunity within UPM. [The university] has plans in place to grow its presence beyond Morocco [and] Senegal to offer students across the continent access to first class education.”

The growth of African education could also benefit other sectors. “For as long as Africa continues to send its students out, we’re actually taking investment in education away from the continent,” Pelonomi Venson-Moitoi, minister of foreign affairs and international co-operation of Botswana, told delegates at the Honoris launch event on 11 July.

“That money could grow economies on our own continent in many ways. There is a need now because we have education that is not fitted for the economy … and therefore the [Honoris] collaboration could help us to find out what is suitable for each [region].”

The private investment requirement for the next five years in sub-Saharan Africa’s formal education sector is estimated to be $1.5 billion-$2 billion, according to a 2017 report entitled The Business of Education in Africa from the African Private Equity and Venture Capital Association.

While the investment thesis is compelling, the benefits of this rush to the education sector are yet to be seen. None of the deals mentioned have yet been exited, though UPM has grown at double digits in terms of EBITDA, revenue and student numbers since DPI’s investment.

Amsterdam-based fund manager XSML made the first investment from its $50 million African Rivers Fund in a Democratic Republic of the Congo-based education provider in May 2016. The firm currently has three investments in African schooling, the first of which – a 2012 debt-financing deal from its $19 million Central African SME Fund – has received most of its principal back, Barthout van Slingelandt, managing partner of XSML, told PEI.

However, with Africa’s rapid urbanisation and developing middle class it appears inevitable that demand for education will only continue to grow.

“Of Africa’s one billion people, half have not even reached university age yet,” Phillips added. “There is a huge tide of a demographic driver about to arrive and demand more quality education.”