World’s Biggest Private School Operator GEMS Seeks $1 Billion

GEMS Education Ltd. is seeking to raise between $650 million and $1 billion as the world’s biggest privately owned provider of school education aims to expand before considering an initial public offering.

The company, based in Dubai, United Arab Emirates, is raising funds from debt, equity and real estate partnerships to build 21 new schools, including in the U.S. and U.K., in the next three years, Chief Operating Officer Dino Varkey said in an interview in Dubai last week. Some 130,000 students attend GEMS network of 100 schools in 11 countries. The company will also use money raised to boost capacity at 10 existing institutions.

“There is a significant amount of demand in the U.A.E., but also huge demand across Africa, across east and south Asia,” Varkey, 32, said. “Governments on their own cannot fund this demand, they cannot move fast enough to meet this demand.”

Private schools are expanding to bridge a widening divide left by the public school system. The funding gap to achieve a 2015 target for universal primary education in low-income countries has increased to $26 billion in the past three years from $16 billion, according to the United Nations Educational, Scientific and Cultural Organization. Some 61 million children don’t have access to primary school, UNESCO estimates show.

“To look at the potential growth of the private sector in education, you only need to look at the growth of the private sector in the health care industry over the last 40 years,” Varkey said. The industry shares “the same fundamentals, the same need, the same challenge,” which private companies have helped to address.

‘Next Challenge’

GEMS Education has seized upon growing demand for private education since 1980, when Dino’s father and current GEMS chairman, Sunny Varkey, took over the business his parents established in 1959 and started opening new schools. At the time, GEMS operated one school with 300 students.

Now it employs 11,000 people and offers a variety of curricula -- including American, British, Indian and International Baccalaureate -- charging fees ranging from $750 a year to $40,000 a year to serve different income segments. GEMS makes about $500 million in revenue a year and is the biggest privately owned provider of school education, Varkey said.

“We are trying to figure out what a $250 to $300-a-year quality model school looks like,” Varkey said. “That is the next challenge.”

Private Education

Borrowing costs for Dubai-based entities have tumbled over the past year as key government-owned companies successfully refinanced or repaid debt and the economy recovered. The emirate’s government sold $750 million of 10-year Islamic bonds in January, paying 40 percent less than the previous sale.

The burgeoning private school industry has attracted the attention of investors. The Abraaj Group, the Middle East’s biggest buyout fund, bought 25 percent of GEMS in 2007, restructuring the stake five years later into a three-year convertible loan instrument, according to Abraaj’s 2011 annual report. GEMS Education’s operating profit more than doubled during Abraaj’s holding period, according to the report.

The education provider is in talks with several companies about potentially taking on another strategic partner, although none of the negotiations are “mature,” Varkey said.

GEMS also won’t make a decision on an IPO until it completes the current round of expansion since the payback period for a school is about seven years, Varkey said. “Four or five years from now, when the organization is a different size and scale, that’s a decision we make at that point,” he said.

‘Resilient’ Business

The company is also looking at new funding avenues such as educational real estate investment trusts in countries like Singapore, Varkey said. In Dubai, home to the world’s tallest building and artificial islands, GEMS also continues to grow as it caters to an expatriate population that accounts for more than 80 percent of the U.A.E.’s 8.3 million people.

Growth in the second-largest Arab economy, which comprises seven emirates including Abu Dhabi and Dubai, is picking up after a real estate crash triggered by the 2008 global financial crisis. Dubai’s economy is projected to expand 4.6 percent, on average, between 2012 and 2015, more than double average growth in the prior four years, according to government estimates.

Education is a “resilient” business and GEMS managed to boost revenue by 7 percent even during a downturn in Dubai in 2009 and 2010, Varkey said. GEMS has “access and support from the leading banks locally and regionally,” he said. The company is establishing partnerships with developers whereby they build schools and then lease them to GEMS, Varkey said.