Publish Date

Sep 25, 2019

Education – The Next Infrastructure Frontier?

A&M Tax Advisor Weekly

Growth in Infrastructure investment continues to be a trend that has been unaffected by all manner of challenges, including the ever increasing global (and regional) political and economic instability. New capital continues to enter the market place at an incredible rate, meaning competition has never been more intense. Traditional infrastructure assets are being purchased for EBITDA multiples, which can only be described as eye watering. Accordingly, the migration of infrastructure investors into new sectors has been unsurprisingly swift.

Telecommunications assets can now almost be considered as true hybrids between private equity and infrastructure, while the universal interest in healthcare suggests this sector will follow the same path in coming years.

So the question arises, what is the next big thing? A look at some of the key aspects of the education industry suggest this sector could be just that.

Traditionally a resolutely private equity playground, the core model around value generation in education is to:

  • 1. Amalgamate – a large number of private schools globally are either family owned or non-profit organisations
  • 2. Grow EBITDA organically by building additional capacity to serve the growing demand in private education as well as through fee increases and cost management

Recent, widely reported and high-profile education deals show that education can derive top end returns for private equity investors, but accordingly that pricing of international school groups is not for the faint of heart…

Such pricing naturally plays into the hands of infrastructure investors and their lower cost of capital. There are also a number of other characteristics of education businesses which provide food for thought on the topic of education as a future mainstream infrastructure asset class.

Yield and stable cash flows

While school businesses can be cash intensive where expansion capital expenditure (CapEx) needs are high, school businesses generally provide very predictable, stable cash flows given the beneficial working capital cycles: revenues are collected in advance at fixed times of the year and costs are easily budgeted for in advance with little variance. It is true that there is no effective long term contracting. Students can be locked in for as little as a term, but student retention is very high with average tenure spanning five to twelve years depending on the proportion of expatriate students. This is unlikely to change given the chronic underfunding of state education globally. This is especially true in premium private schools. It is interesting to note that enrolment numbers in secondary, and tertiary, education have exhibited stable secular growth since the Second World War across OECD economies, with there often being countercyclical volumetric behavior during recessions, a point which is further addressed in the following paragraph. In addition, long-term forecasts of student volumes are considerably more reliable than, for example, vehicle rotation for car parks or container numbers in ports. This is because the students of future decades are all already born, lending much greater confidence to long term projections that would be central to infrastructure investors’ financial models.

Furthermore, the need for education is generally unaffected by political and cultural changes and upheavals. Education businesses are also much less linked to economic cycles, due to there being reduced volumetric correlation to the economic cycle. People will view sending their children to school as an absolute base necessity. This is not the case in many core sectors such as those connected to transport.. There is no real alternative or the option to reduce consumption. The underperformance of certain high-profile infrastructure investments in “GDP-linked” businesses during the 2008-2009 downturn, such as some car parks, toll roads or ports, demonstrates how important an upside this factor is to education as an infrastructure investment.

Real asset backing

School businesses have traditionally favoured leasing rather than owning school properties for the obvious reason that rates of return on capital employed on property acquisitions can be better deployed on expansion CapEx or further acquisition of school businesses. This is true even when balanced off against the impact lease payments have on EBITDA, i.e. reducing this key measure of an education businesses value. Similarly, since school businesses are often acquired with properties already owned, cash has been raised by selling properties to deploy on expansion CapEx or further acquisition of school businesses…