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Description:
Investment possibility in low-cost private education
Objective: This proposal outlines an equity or debt investment opportunity in a Chinese education company called the Sunshine Fortune Education Investment & Consultancy Company, which is serving the educational needs of the poor, improving their educational and social prospects. The minimum investment required is $325,000 which will create a small, sustainable chain of low cost private schools. A larger investment will allow the company to dramatically expand to achieve impressive profitability targets while serving a disadvantaged group of families whose needs are otherwise not met.
Background: In China, there are two types of families who are not served by government schooling and whose needs are only currently met by low cost private schools. First, the ‘floating population’ or migrant workers; such families are generally not legally permitted to reside in the urban areas, and so children do not have the necessary paperwork to attend government schools; even if they do, they meet with discrimination in public schools. Secondly, in remote rural areas, government schools are too far away from many villages; parents don’t want their children to walk for two or more hours to school each day, so seek private schools in their remote villages. Both types of parents provide opportunities for Sunshine Fortune Education, which is committed to serving underprivileged education markets in China.
The company began in January 2008 to create an embryonic chain of three low-cost private schools serving the migrant population in Beijing. It has created an organisation and the intellectual property which can serve as the basis for a large scale chain of low cost private schools across China. The company has engaged in close discussions with local government officials, who have become very supportive of its aims and objectives. The three schools acquired have had a thorough make-over upon acquisition, with immediate infrastructural improvements and ongoing teacher training, management training and curriculum development. Each school is given a profit target by semester, which is managed by two principals (one focusing on education, the other on operations). A detailed school operations manual has been developed and the teaching quality team is continually in the field monitoring teacher progress against student achievement, and mentoring and training teachers.
The marketing team has undertaken comprehensive market research of likely districts for expansion within Beijing and beyond, and identified on the basis of detailed criteria likely next acquisitions. Company estimates are of around 800 low cost private schools serving the migrant population of around 5 million in Beijing, a similar number in Shenzhen and around 600 in poor communities in Gansu province. These estimates are likely to be applicable to other major cities and poor communities across China.
There is currently no competition for Sunshine Fortune with companies looking at the low-cost segment, although several major education companies do have a very small number of low-cost private schools as part of their corporate social responsibility programme.
There are currently 12 staff employed by the company (including school principals and directors, but excluding teaching staff), who are engaged in school operations, marketing, developing strategy, teacher development, and curriculum development.
Investment Plan: By the end of June 2009, the company had taken an investment of around $500,000, acquired three schools and created the company poised for growth. An additional investment of $325,000 is required to acquire and refurbish three new schools in academic year 2009/2010 and continue with the educational interventions, which will allow the company to break-even at the of academic year 2010/11 (i.e., at the end of second year of investment). For this “steady state” investment, the company would eventually return modest profits of around $120,000 per year, with IRR of around 9%. However, a more ambitious investment programme could take the company to the scale for which it is been equipped. For instance, an initial investment of $730,000 in year 1, to create 7 new schools, followed by an investment of $4.58 million in year 2, would create an impressive chain of 70 schools. In this scenario, the company will become cash-flow positive at the end of Year 4. EBITD at the end of Year 5 is $1.8 million, rising steadily thereafter. The IRR in this case would be around 20%. An exit option would be for either IPO or for the company to guarantee repurchase of the shares after an agreed period.
Learning outcomes: We have already seen improved teacher motivation and engagement, and improved learning outcomes in English, maths and Chinese in the first three Sunshine schools. The educational model developed is one which provides the way of identifying weaker teachers, and children whose understanding is limited, and ‘blitzing’ these with additional help and assistance. Our educational philosophy is that every child is important and that no child should be left behind in attaining the basics. We are also proposing to develop our facilities for focusing on children who are gifted too. Our assumption is that with our investment in learning and teaching, learning outcomes will be significantly higher than those in other low cost private schools and at equivalent or higher level than in the good public schools.
Management Assessment: The current CEO of the company has learnt his role in management over the past nearly two years of running the company. He has performed exceptionally well to date. He is supported by a team with exceptional experience in managing private schools and in teacher support in the public and private sectors.
Risks: The economic crisis obviously could impact on the presence or otherwise of the migrant population in the major cities. However, our share of the market projection is small enough to make us assume that there will be enough customers for the schools even in the face of a recession in China. A second risk is changing government policy. Our connections with government officials at the district level suggest that, on the contrary, government policy is likely to become more favourable to the low cost private education sector. We will continue to foster links with local politicians and officials and rekindle those at a national level too.