GCC education sector offers new investment areas post Covid-19, Alpen Capital says

Implementation of technology and fee reductions have impacted profitability and revenues of operators, research finds

Education has long been an attractive sector for investment in the GCC. Courtesy: Dubai School

The GCC's education industry is expected to witness an influx of investments to support the growing demand for technology-based learning amid Covid-19, according to a new report.

The pandemic has compelled educational providers in the GCC to realign their business models and seek more investments in digital platforms to drive future growth and improve operational efficiencies, Alpen Capital’s GCC Education Industry for 2021 report said.

“The GCC education sector continues to be fragmented with several size and types of operators catering to a wide population with varied preferences,” Krishna Dhanak, executive director of Alpen Capital, said.

“The industry witnessed healthy M&A activity over the last two years, with several nations strongly advocating privatisation and others opening up the sector for foreign ownership.” This cross-border M&A activity is set to continue.”

Education, and in particular K12 schools, has long been an attractive sector for investment. The underlying fundamentals are positive and provide investors with a defensive position in troubled times and significant upside when economic conditions are strong, according to a GCC education report by Bahrain investment bank GFH in 2020.

These fundamentals are particularly evident in the GCC, it added.

Student enrolments in GCC schools and colleges crossed 12.2 million in 2019, from 11.8m in 2014, according to Alpen Capital. While the gross enrolment rate for primary and secondary schools remained above 100 per cent, growth was driven by a rise in enrolments in the pre-primary and tertiary segments at a compound annual growth rate (CAGR) of 3.7 per cent and 1.9 per cent, respectively, between 2014 and 2019, the investment bank said.

Although nearly 1.6 billion students in more than 190 countries were affected by school closures amid Covid-19, the transition to online learning has been relatively smooth in the GCC.

“Covid-19 has caused significant disruption to the GCC education industry but governments and operators have been swift in their response in terms of policies, initiatives, teaching methods and business models to ensure continuity of education,” Sameena Ahmad, managing director of Alpen Capital, said.

“The pandemic has placed integration and utilisation of technology within the education system at the forefront.”

With GCC governments facing spending constraints amid the pandemic, they are expected to further open up the education sector for foreign ownership and adopt public-private partnership models, the report said.

Also, with the region emerging as a tertiary education hub, governments and private players are likely to invest in colleges and universities to develop talent within the region, Alpen Capital said.

The investment bank also predicted more acquisitions and consolidations in the sector as operators face pressures on profit margins and valuations are at more realistic levels.

“Demand-supply imbalance, enforced implementation of technology and fee reductions have impacted profitability and revenues of operators. Hence, M&A in the sector will help create better synergies, improve cost margins and increase management efficiency,” it said in the report.

There is a huge investment opportunity in the pre-primary education segment as well as in vocational and technology training colleges in the GCC, Ivor McGettigan, partner at law firm Al Tamimi & Company, said during a webinar to release the report.

Growth drivers for the GCC education sector include the post-pandemic economic recovery, an increase in school age population and high disposable incomes.

The GCC K-12 school age population (0-18 years) is expected to grow by 1.3 per cent annually to 16.3 million by 2024, while the 19-23 year age group is projected to grow at 0.6 per cent to 3.9 million. The anticipated rise in school and college age population is expected to drive enrolments in the sector.

The GCC economy is expected to rebound over the next two years with gross domestic product to grow at 2.3 per cent and 3.5 per cent in 2021 and 2022, respectively, according to Alpen Capital.

“This is likely to drive recovery in the education sector as physical education resumes and operators evaluate expansion plans that were otherwise put on hold due to the pandemic,” the report showed.

Rising per capita income has increased the ability of the GCC population to spend on quality education, the report said.

“Recent developments in the region’s geopolitical relations, supplemented by a post-pandemic economic recovery and government initiatives and policy changes will result in new investment avenues for investors across the sector,” Mr Dhanak said.

However, the GCC education sector also faces challenges to growth. The pandemic has hit spending, which could potentially slow the pace of growth, the report said.

Also, the influx of international institutions has increased competition among private operators. Fee reductions and digital learning platforms have driven down revenues.

The shortage of skilled teachers and preference for tertiary education in overseas destinations are also hampering growth, according to Alpen Capital.