by Gabriel Sanchez Zinny – Co-founder, Kuepa

Private equity is growing fast in Latin America, bringing capital, professionalization and consolidation to a number of markets. These sectors include traditional areas such as retail, banking and infrastructure development – but perhaps more surprisingly, private equity funding is getting actively involved in the education sector as well.

Several trends have contributed to making the education market attractive for investors. First, demand has been increasing not only for access to, but also quality of, education Second, Latin America has seen the growth of a middle class with the necessary resources to consume higher quality education and a better understanding of its importance in the struggle to move up the economic ladder. Finally, the education markets are realizing the need for better and more efficient management. These macroeconomic realities, in turn, are combining with deep changes in the school systems themselves: in particular the explosive growth of classroom technology and the drive towards personalized and blended learning alternatives.

Both strategic acquirers in the education sector and private equity investors are taking stakes in Latin America, mostly with a focus on higher education. Laureate Education, backed by Sterling Partners, has already bought over 30 universities in Latin America. The Whitney International University System now includes schools in Argentina, Brazil, Chile, Colombia, Costa Rica, Panama and Paraguay that offer fields of study ranging from technical and associate degrees to doctoral and master’s programs. And in 2008 the education company Apollo Group, which owns the University of Phoenix, acquired Chile’s Universidad de Artes, Ciencias y Comunicación. Apollo has also purchased a majority stake in Mexico’s Universidad Latinoamericana.

In the US, PE firm Apollo Global Management generated headlines in November 2012 after acquiring the publishing and textbook division of McGraw Hill for $2.5 billion. The move garnered attention not only because of the size of the deal itself, but also because it was a sign of  how technology will impact the way we teach and learn. Textbook-only publishers are going through a deep transformation in trying to adapt to these technologies. This is true in Latin America as well, with a group of investors led by DLJ South America Partners (today Victoria Capital Partners) acquiring 25 percent of Santillana, the largest textbook company in the region.

DeVry – a specialist in higher education with some 80,000 students and more than 90 North American campuses – has also begun to look toward Latin America. In 2009, DeVry acquired 82 percent of Fanor, a university in northeastern Brazil. Among private equity investors, Linzor Capital, which operates in Chile, Argentina, Mexico and Colombia, entered the education market in 2009 by acquiring a majority stake in the University of Santo Tomas de Aquino, the oldest private higher education institute in Chile.

Higher education and language training have been the primary recipients of private investment, with online learning platform Open English as one the most successful cases in recent years. However, elementary and high school might be next, especially if we expect Latin America to follow the current trend in the US.  According to the New School Venture Fund, over the past year, 74 companies focused on the K-12 demographic have been funded by venture backers for a total of $427 million.

Latin American investors that seek both profits and the opportunity to expand quality education in their countries have a very large target market. The region has over 100 million students in hundreds of thousands of schools in highly fragmented systems in need of professionalization and better management. It is a perfect opportunity for private equity investors to both make money and improve the competitiveness of their societies. In fact, in LAVCA’s latest survey of 105 private equity investors from around the world, education is the third most attractive sector, after consumer/retail and financial services.

Multilateral organizations have also jumped in – particularly the International Finance Corporation, or IFC, a part of the World Bank Group. The IFC has more than $400 million for education, and has focused strongly on countries like Brazil, Chile, Colombia, Mexico and Peru over the last year, mainly in the higher education sectors.

But there are obstacles as well. The K-12 sector is highly regulated by government, which is also the largest provider of educational services. This is another challenge for the private equity sector, given the heavy and sometimes unpredictable role of legislation in defining the market. In Chile, perhaps the most open economy in Latin America and where private education predominates, the government is debating changes in response to student protests and growing anger over college debt.

The Chilean protests demonstrate that not everyone thinks that private involvement in education is beneficial. The students protested the levels of state financing for education, the inequality of access and the involvement of business interests in the education sector. But despite these reactions and the clear need for good regulations of the education sector, the role of the private sector has only been increasing.

Education is a sector in which there is largely only one real provider – the government. In this context the private sector – well regulated and supervised – can offer a dynamic, entrepreneurial spirit that has been sorely lacking. If done right, it will increase the options for both parents and children, and thus contribute to a significant improvement in education quality.