Tuesday 12, June 2018 by Jessica Combes

The education opportunity


Mark Desario, Co-founder and CEO, Investbridge Capital and board member of Africa Crest Education spoke with Banker Africa about the company’s foray into the African education market

Tell us about Africa Crest Education (ACE). 
Africa Crest Education it is a UAE-based company, registered as a holding company in the Dubai International Financial Centre. The reason it was established in the UAE is because there has been an enormous amount of effort made by the UAE Government to be cognisant of the trade relations and tax negotiations with various Africa markets and to make it very efficient to have inflow capital coming from the UAE into the various African markets. As such we purposely built Africa Crest Education because the UAE, and in particular Dubai, is a fantastic gateway city to execute business across the entire pan-African marketplace.

ACE is a growth platform for a 130 years old Lebanon-based education company and platform, known as SABIS. SABIS was originally founded back in 1886 and has grown to be one of the largest private school operators in the world today, operating 58 schools and 70,000 students across five continents everywhere, from mature markets such as the United States, Germany and the UK to many of the emerging markets and frontier markets here in the GCC, Pakistan, and most recently Panama in addition to the African market with two schools that are in Cairo, Egypt.

What is Investbridge Capital’s role in ACE?
Investbridge Capital (IBC) is built predominately to identify entrepreneurs or entrepreneurial companies that have experience, vision and execution ability. We then bring forward the structural and capital activities in order to help them meet their goals. ACE was discovered through my Chairman’s relationships. We came to know the SABIS organisation and have made 20-30 trips to their corporate offices in Lebanon and many of their schools around the world to understand how they operate and whether they actually had a business model that was expandable.

We fully concluded that they could execute an education investment in Africa, but the thing that stood in their way was efficient capital to acquire the land, build the schools and get their operating platform in place. What we did is put together a structure that was attractive to institutional investors. What do institutional investors require? They want transparency, they want governance, they want to know how decisions are being made in the best interests of the investors that have given their capital to invest. They want to know that you have a proven track record, and can they take that track record into new and emerging markets. All these are things that IBC has put together to ensure SABIS’ success that they’ve had for the past 130 years continue on the African continent.

The other major thing we did which we consider of paramount importance prior to any leaps to frontier, emerging or growth markets is to secure local knowledge and local capabilities. One of the very first things that we did was found a phenomenal local partner in Centum Investments which is a publicly listed 50-year old company which trades on the Nairobi and Uganda stock exchange and with massive local experiences in the real estate market. [Centum Investments have] become a founder, sponsor, investor and development partner for these schools. By having that local expertise and having them sit on the board with us and having them guide us through the East Africa marketplace, that gives the confidence to investors that we will actually execute.

So Investbridge is bringing primarily institutional investment to the ACE platform?
Yes, so you saw most recently it was announced that the Dubai Investment Corporation has committed $20 million direct investment into ACE. This is their first foray into the East Africa market as an investment.

The goal is to attract institutional monies that can look at the opportunity for where it’s heading to and not flipping the investment quickly, it’s really taking a patient investment process. Now because we do recognise that everybody has an interest in investing in education and everyone in our region particularly knows of the SABIS success story we built an investment vehicle, a special purpose vehicle, that we can actually sell, or allow for qualified investors to invest into, that is much smaller than normal because in order for an investor to invest in ACE the minimum investment amount is $10 million.

That number is by far aimed at institutional investors and the likes of the Dubai Investment Corporation. We also recognise that there are family offices, ultra-high net worth individuals, and investors that are very interested in the story but may not have the ability or the confidence to commit a full $10 million, so we’ve created a special purpose vehicle that will allow for these types of family offices and individuals to invest at a much smaller threshold but still get the same economic experience as if they had invested straight into ACE. It’s important to understand that ACE is a company, not a fund. This is a company that has its own CEO, its own CIO, its own professional management team.

So this investment, what does it look like? Is it bricks and mortar, is it schools?
That’s a really great question. I get that a lot, ‘am I investing in real estate, or am I investing in a school or am I investing in the operator?’ As you break down the pockets of the education sector there are many different pockets. Ours is a very simple process, in the first phase 85-90 cents of every dollar that’s invested goes into the bricks and mortar. This is actually comforting for the investor because then they aren’t investing in, say, a philosophical technology or a soft cost overhead of human resources. It’s going into a physical asset of bricks and mortar which, by and large, by the time the investment has completed, and the school has been built, has achieved a multiple increase in value just by nature of its existence. So the money gets deployed predominantly into the bricks and mortar—buying the land building the school, and then some very small amount for initial start-up capital.

We have identified seven schools in our first pipeline and will spend about $125 million. More than 90 per cent of that is going towards bricks and mortar. What’s really extraordinary is that these schools become cashflow positive and self-sustaining almost immediately within a year and from there on you’re looking at all kinds of growth opportunities as your student population goes from start-up to getting to a mature school—which we don’t expect to happen for seven to eight years.

We aren’t turning around and saying let’s build a school, open it up and it will have 2000 students; we believe it takes a long time to mature that up, but the issue is how much cash you need before you get to that cashflow breakeven and then can allow for this organic growth of the school.

Legally what we’ve done, and we may, in certain jurisdictions, separate holding the school in a different entity than holding the actual physical operations of the school which gives us all kinds of flexibility in the future in having all the physical assets spun out into a specialised real estate investment trust for the benefit of the school operators. In our first phase though we will keep both sides consolidated and together, so we have both the asset coverage and the residual revenue, the profits of the school, coming to us.

Just to clarify, the schools will go cashflow positive in the first year of operations?
All our business models project that the school should become self-sustaining and cashflow positive within the first full year of operations based upon a certain target for the initial student body. When you’re looking at investing in a school you need to allow yourself 24-36 months for a development period, which is the identification and acquisition of the land, the building of the school and getting it all ready for the licencing. There is a very heavy upfront investment for the first two to two and half years, and that’s all on the development side.

Once the school opens its door, if you’ve done an effective marketing job and all the things that need to be done, you should be able to capture within the catchment area that you’ve established a student body of at least a couple hundred which will help you to get to be cashflow positive against your overheads. Now this is not going to return your invested capital, but you should not have to make any further investments into the school, and then it is now a matter of how quickly can you grow the student body to get to a mature school that will allow for a rational and reasonable return on investment on the initial commitment.

It all works mathematically and it all works financially, but most importantly it works from the operator’s perspective and that they are aligned to make sure that school can perform not for a year or five years but for decades and decades and it’s a model that as I’ve said SABIS have been doing for 130 years and we’ve been able to look at that historic track record to make sure that this is a viable option as we come into the African market.

Which markets specifically are you looking at in Africa and why?
We already have business operations in North Africa in Egypt and most definitely there will be an expansion across Egypt and we are looking at Morocco as well as an extension.

In addition we already have substantial insider knowledge because of our East Africa local partner in Centum, that became a very important component for us because we would like to have the local partner in the markets that we are going into to give us that granularity and knowledge and be able to execute. Nairobi is where we have put our flagship 20-acre school that we will open September 2018, whilst at the same time, we are looking very carefully at Uganda where we expect to open a school in September 2019. We have also taken a position in South Africa in Pretoria, where we will also do an international 20-acre school with a full slate of offerings.

Whilst all of this is happening we are very carefully looking at our West African strategy and our strategic partner. We’ve been in extensive dialogue with several different groups and land owners and capital markets players trying to figure out how we approach the likes of Ghana and Nigeria and other West African markets. I think that by the end of 2018 we will be announcing who our strategic partners are out there as well.

Do you have anything to add?
The issue of making this foray into Africa is not something that we woke up one day and said okay let’s do this it sounds interesting. It’s been substantially analysed and evolved and vetted and the success is based upon having a partner onboard who have experiences of going into new markets with SABIS coupled with our partnership with Centum.

If you get the partnerships right, particularly on the local side, then you can give yourself the essence of success, but you have to have patience. The paradigm I’ve noticed about coming to this market is that I see billions and billions of dollars from private equity investors from around the world, from the States, from Europe, from Asia, and they’ve raised money to go buy things. I think that Africa as a continent has extraordinary opportunities, but it is not about buying something at some multiple today, it’s about investing and building platforms of businesses. Our belief is that there are huge opportunities across the continent, but you have to have the patience to do it right.

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