Education has 5 key characteristics, which make it an attractive investment opportunity.
1. Long term revenue visibility
Typically, when you enrol a student in an institution, the student then stays for 1 year, 2 years, 3 years, 4 years, even as long as 7 or 8 years, in the case of a K-12 school. That gives you great revenue and cash flow visibility and helps you amortize the student acquisition cost over a longer period.
2. High barriers to entry
Good education businesses have high barriers to entry. These barriers may be due to the capital required to set up or the accreditations required to operate or it could also be through reputation. When you would have chosen your undergraduate or post-graduate institution, you would have observed how well-recognized, reputed the institution is amongst employers, what your family, friends, say about it etc. All of these things create a barrier for a new entrant to enter the market quickly.
3. Demand is usually greater than supply
The third element that makes education an attractive investment opportunity is that demand is usually greater than supply, especially in emerging markets. Education, especially private education, is more and more an aspirational product. Public sector education institutions are often at capacity or of poor quality, so there is always more people applying than seats available. Moreover, supply is inelastic because you can't add seats variably. You add seats as a lump sum. If your competitors have not added seats and they're running full, you can benefit next year because you have the seats and they will not go back to the old competitor.
4. Prices typically rise faster than inflation
In education, prices typically rise faster than inflation. That's because private education pricing is usually linked to white collar salaries. Typically, the people who can afford to attend, their income levels or the families’ income levels are growing faster than inflation.
5. Economics are attractive
Lastly, the economics of running an education business are very attractive when run well. Education businesses typically return 15 to 25% profit margins, but more importantly, you collect the fees upfront and therefore have a positive working capital position. These economics make education very attractive.
Depending upon which sector of education you are in, be it higher education, vocational, English language, K-12, some of the above attributes may vary. For example, with English language, the revenue visibility is lower because you are doing 3-month courses, 6-month courses, so it may not be very strong on that attribute, but then there would be other elements that would work in its favor too.
