Mumbai : The education sector in India can be divided into formal and non-formal segments. The formal segment refers to K-12 and higher education. Although this segment constitutes more than 80 percent of the market size, the opportunities to invest in this sector remain limited due to strict regulations that prevent the participants from distributing profits. The non-formal space is relatively small in size, but the low levels of regulations allow the participants to distribute profits.

New analysis from Frost & Sullivan (http://www.financialservices.frost.com), Investment Opportunities in Indian Education Sector, finds that there have been close to 60 deals worth more than $640 million since 2006 in this sector. Out of these deals, there have been 21 deals amounting to $250 million in the first half of 2010 alone.

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“Due to the innovative business models that have emerged in the education sector, investors can benefit from profits repatriated from subsidiaries,” notes Frost & Sullivan Financial Analyst Ramani Madusudanan. “Emergence of these working models, coupled with scalable and sustainable business opportunities, have attracted private equity (PE) firms to this sector.”

The increased interest of PE/VC in the education sector is because of high levels of profitability and freedom in pricing of services. In addition, stable cash flows unrelated to business cycles and low penetration of organized participants makes this an attractive market.

“This sector is expected to be driven by the increasing propensity of the middle class to spend on education,” adds Madusudanan. “The low penetration levels of education in India and the absence of adequate infrastructure have led to significant opportunities for investment into this sector.”

The value of most of the deals in the sector is in the range of $20 million. The participation of investors has so far been low due to regulatory barriers in the formal education segment.

“To facilitate PE investment in this sector, either regulations need to be relaxed or participants will have to adopt innovative models to distribute profits,” says Frost & Sullivan Business & Financial Services Director Kirti Timmanagoudar. “Even though there have been only 5 exits, the exits have given 7.2x returns, making the sector a highly attractive option for investors.”

The deal size in the formal segment is higher than in the non-formal segment. The non-formal segment tends to be asset light in nature. It is not capital intensive and the operational leverage kicks in once the business achieves a considerable scale. The gestation period for such businesses is lower than those in the formal space. Investors in the formal segment (physical space) are expected to have a longer investment horizon of five to seven years to realize better valuation and higher exit multiples.

“Currently, given the scale of operations, the education sector can be of significant interest to growth stage VCs, who usually have a longer time frame,” concludes Madusudanan. “Once the startups achieve a considerable scale in 2-3 years, the segment will be attractive to PE investors.”

Investment Opportunities in Indian Education Sector is part of the Financial Benchmarking in the Education Industry subscription. The study discusses various working models adopted by key participants in the Indian education sector. It also has a detailed analysis on the financing deals that have taken place from 2006 to 2010 in various segments of the market. All research services included in subscriptions provide detailed market opportunities and industry trends that have been evaluated following extensive interviews with market participants.

Frost & Sullivan’s Business and Financial Services group serves clients around the world in all aspects of financial analysis, market research and monitoring, due diligence, idea generation, opportunity analysis, investment valuation, and other proprietary research.