Minsheng sets up M&A fund with CICC as China tightens control on private education sector

  • The fund aims to raise US$1.5b to invest in higher education segment
  • Beijing’s move to curb expansion in private education sector has hammered education stocks since the second half of 2018
PUBLISHED : Wednesday, 02 January, 2019, 6:37pm
UPDATED : Wednesday, 02 January, 2019, 11:04pm

Minsheng Education Group, a Chinese private college and high school operator, will set up a merger and acquisition fund with investment bank China International Capital Corporation (CICC), according to a filing to the Hong Kong stock exchange on Wednesday.

The move comes amid mounting worries over China’s tightened controls on the expansion of private schools through M&A deals, which has hammered the Chinese education stocks around the world.

The fund – a partnership with CICC’s fund management arm CICC Capital – aimed to raise 10 billion yuan (US$1.5 billion) over four phases and would focus on investing in the private higher education segment, Hong Kong-listed Minsheng said in the statement.

It “will entitle [Minsheng] to the first priority to acquire investment projects invested by the M&A Fund, which provide a high-quality project reserve in a planned way for the group’s expansion,” the statement said.

Minsheng operates and has stakes in eight private colleges, including one in Singapore and one in Hong Kong. It has not slowed its pace of acquiring schools since Beijing’s unexpected policy shift in the second half of 2018 that dimmed prospects of China’s burgeoning private education sector.

It took a 51 per cent stake in a vocational school in mainland China’s eastern province of Shandong for 92 million yuan in November, and completed the purchase of a 51 per cent stake in a private college in southwestern Yunnan province for 583 million yuan in December.

The State Council, China’s cabinet, banned in November private kindergartens from seeking public listings in global capital markets to raise funds, after a draft education legislation in August in effect prohibited operators of primary and middle schools to expand through M&A deals.

China’s ban on kindergartens raising funds in capital markets sparks education stock sell-off, clouds preschool sector’s prospects

Analysts said the fund came at a sensitive time, as previous policy changes had yet to restrict M&A activities among high schools and colleges.

Mergers and acquisitions will continue to be the most important way for higher education firms to expand
Xu Qiwen, China Securities International

Funds that were raised for investing in the education sector could shift to the higher education segment from other segments, they said.

“Comparing with K9 [kindergarten to 9th grade] education, policy risks for higher education is relatively smaller for any investor who wants to put money in the education sector,” said Lewis Pang, an analyst focusing on education stocks at Cinda International Holdings.

And industry funds like this one could provide an important source of capital for Minsheng in addition to the company’s cash and loans, according to Xu Qiwen, equity analyst at China Securities International.

“Mergers and acquisitions will continue to be the most important way for higher education firms to expand,” Xu said.

In June, China Education Group, a domestic peer of Minsheng, said it would join hands with Value Partners Group to set up a China education fund targeting 5 billion yuan in assets under management.

Shares of Minsheng dropped 1.5 per cent to close at HK$1.29 on Wednesday. The stock tumbled 18 per cent in 2018, in line with a 14 per cent decline in the Hang Seng Index.