December 2016

GEMS EDUCATIONPARTNER COMPANY CASE STUDY

ABOUT GEMS EDUCATIONGEMS was founded by the Varkey family in 1968 through an Indian curriculum school based in Dubai. Mr. Sunny Varkey took over the business in the early 1980’s and, by 2006, had transformed the business into one of the largest private K-12 operators in the world, with a presence in the UK and the Middle East. GEMS had developed a well-recognized brand offering high quality education across various curricula and price points.

On the backdrop of the government’s commitment to reinvest within local economies and support the long awaited economic diversification process, GEMS benefited enormously from the major influx of expatriate population. GEMS had been demonstrating strong growth, despite the high level of complexity of the multidimensional business model: it built and operated its own schools, and beyond that, due to its strong reputation and diverse curricula, was also able to manage third party private schools. The company’s strategy was to offer high quality international curriculum to the growing expatriate community in the UAE, through a diversified portfolio of schools including premium international schools as well as mid to lower price point schools. Most of GEMS’ schools are accredited by international organizations.

SOURCING THE INVESTMENTIn 2006, Mr. Varkey was looking to roll-out the education platform across the region and

was seeking to onboard a strong partner to facilitate the expansion strategy. While the vision for expansion was clear, there were various challenges including financial requirements to execute the business plan, recruiting a strong management team, sourcing and executing new opportunities and improving the systems and processes. Abraaj worked with Mr. Varkey prior to the transaction to develop a strategic roadmap.

INVESTMENT RATIONALEIn addition to GEMS’ unrivalled leadership position, the private education sector in the region appeared promising on the back of strong macroeconomic drivers including high population growth and favorable demographics, increasing demand for private education especially among expatriates, high level of affordability, and an underperforming public sector. Overall, Abraaj viewed the sector as a high growth yet resilient sector given low student churn and high level of visibility.

The demographic profile of the Middle East, North Africa and South Asia (MENASA) region was attractive. Demand for education was viewed as non-cyclical: its growth rate could vary amongst countries and/or population segments, but the general growth trend would remain a consistent theme. At the time of the acquisition, GEMS’ 10-year plan was to grow its schools from 35 to 350 and students from 58,000 to over 500,000. In

IN BRIEF

REGION: Middle East and North Africa

INDUSTRY SECTOR: Healthcare and Education

DATE OF INVESTMENT: December 2007

STATUS: Exited

GEMS’ decision to partner with Abraaj was based on the recognition of Abraaj’s ability to support GEMS, not only to execute its expansion plans, but also to build out the operational backbone required to enable the expansion.

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LOOKING AHEAD

VALUE CREATION DRIVERS

GEMS EDUCATIONPARTNER COMPANY CASE STUDY

In January 2012 Abraaj converted its equity to a US$200 million convertible vendor loan note structured at GEMS TopCo level (entity controlling both MENASA and ex-MENASA operations) with a three year maturity and payout events based on certain put/call provisions including upside to Abraaj at maturity. The new instrument featured a robust security package. The Varkey Group exercised the call option in October 2013 marking Abraaj’s full exit from its investment in GEMS Education.

The Value Creation Plan (VCP) included a variety of key elements, ranging from expansion plans to funding strategy, human capital and school operations, regulatory issues, stakeholder interfaces and institutionalization measures.

GovernanceThe new company had a seven-member board where two seats were held by Abraaj. In addition to the board, several committees were established to oversee different aspects of the business. Abraaj played an important role to help the company adopt a more structured approach to achieve its business plan, yet remaining conscious of the fact that organizational changes require time and active engagement.

ManagementBringing onboard a new management team was another important item of the VCP. Key successes in team building included the new Chief Financial Officer, Head of Business Development, Head of Human Resources and Chief Schools Officer, all of whom were able to win the sponsor’s trust.

FundingExpansion plans were ambitious and required an appropriate and timely funding strategy to supplement funding from internal sources. With the help of Abraaj substantial improvements were made and access to international capital markets was initiated with GEMS’ first large syndicated debt facility of US$300 million raised from a group of four major global and regional lenders.

Business Line ExpansionAbraaj helped the company develop existing initiatives into fully-functioning lines of business with material revenue generation potential. These included: GEMS Consulting, management work with partner private and public schools; Envisage, a school audit service; and GEMS Ventures, including assessment services, transport, teacher training, leadership development, and student activities. By mid-2010, these lines contributed 22% of revenue.

With the help of Abraaj access to international capital markets was initiated with GEMS’ first large syndicated debt facility of US$300 million raised from a group of four major global and regional lenders.

Abraaj’s view, based on information from regional Ministries of Education and the World Bank, GEMS’ plans represented only a sliver of the total market opportunity. In 17 MENASA countries (UAE counted as one), the penetration of any schooling ranged from 34% to 89%. Private school fee potential was measured at US$7 billion, with

US$800 million estimated for the UAE alone. GEMS’ decision to partner with Abraaj was based on the recognition of Abraaj’s ability to support GEMS, not only to execute its expansion plans, but also to build out the operational backbone required to enable the expansion.