Thumb rules for investment in private education ; As an industry, private educational institutions in India were worth $40 billion in 2008, a figure that is projected to grow to $70 billion by 2013 and $115 billion by 2018.

The private sector has been playing an increasingly important andinfluential role in India's education sector over the past fewyears. In fact, at last count, over 50 per cent of the country'seducational institutions were privately run (in the US, the privatesector's share is 32 per cent and in China, it is 25 per cent). Asan industry, private educational institutions in India were worth$40 billion in 2008, a figure that is projected to grow to $70billion by 2013 and $115 billion by 2018 from a demand growthperspective, if supply keeps pace.

The problems, however, are two-fold: a large demand-supply gapand average to poor quality of most privately-run institutions.There is clearly an opportunity, therefore, for more private playersto enter the education space. While schooling and higher educationinstitutes are required to be set up as 'not-for-profit' ventures,with mandatory registration as a Trust or Society, quality privateinstitutes are the need of the day. Entrepreneurs and companieswanting to invest in education, therefore, need to follow certainthumb rules.

Market Assessment: A pragmatic assessment of the "catchment ineach segment of education is important, from the standpoint ofachieving required student enrollment, before planning aninvestment. The catchment (in this case the travel time to and fromthe institute) for a pre-school student should be 30 minutes, for aK-12 day school 60 minutes, and for a residential school, this wouldbe five hours. Demand for a vocational training institute originatesfrom within city premises, with few students travelling acrosscities for enrollment. A university or a higher education institutewould ideally attract students from all parts of India as well asSouth Asia, the Middle East and Africa and, therefore, matters wouldbe being dictated by the quality of education on offer and thereputation of the institute.

Key Financials: Setting up an educational institution requiresaccess to large amounts of capital. A regular K-12 school, builtover 2 acres of land with a capacity of 2,100 students, wouldrequire an investment of around Rs 15 crore and so would an MBAinstitute spread over 1.5 acres with a capacity of 240 students. Anengineering college with a capacity of 1,600 students spread over 10acres of land, on the other hand, would require an investment of Rs100 crore. Similarly, the project cost for setting up a privateuniversity over 300 acres of land, with a capacity of 40,000students, may be around Rs 1,500 crore. In these ventures, financialreturns are attractive, with EBITDA levels of over 30 per cent andproject IRRs ranging from 25-35 per cent levels.

Regulation: Shortage of quality educational institutions is aresult of India's tightly controlled regulatory structure. Educationis regulated at both the Central and state government levels. Highereducation has several regulatory bodies, including AICTE and UGC,but there is no umbrella body to regulate K-12 schools nor a uniformlaw for schools. There are considerable entry barriers andregulations that need to be met, and a thorough understanding ofthese would, perhaps, lead to better and quality institutions.

Raghav Gupta is President/Technopak Advisors