'Afya Is A Prime Example Of The Work Bertelsmann Investments Does'
At the beginning of August, the relevant antitrust authorities gave their approval for Bertelsmann Investments’ (BI) follow-on investment in the Brazilian education services provider Afya. Afya is one of about 380 companies BI has invested in since 2006. In our interview, Shobhna Mohn, Chief Strategy Officer of BI, talks about Afya and the Group’s global investment activities.
500 million euros – that’s how much money Bertelsmann put up in June of this year to acquire a 25-percent stake in Afya, a Brazilian education service provider specializing in the medical field. At the beginning of August, the Brazilian antitrust authorities approved the investment. Measured by its stock market value, which is around US$2.5 billion, Afya is Brazil’s largest education company. This major investment was made possible by the work of the Bertelsmann Investments (BI) team, which has known Afya for many years and invested in the company early on. And yet Afya is just one of around 380 companies in which Bertelsmann Investments has invested since 2006, when the BDMI fund was established. BENET spoke with Shobhna Mohn, Chief Strategy Officer of Bertelsmann Investments, about Afya and Bertelsmann Investments’ global activities.
Ms. Mohn, what is the strategic rationale behind the investment in Afya?
Shobhna Mohn: First off, I’m very grateful and happy that we’ve made it this far with Afya now. A single investment of 500 million euros is not something that happens every day, neither for Bertelsmann Investments nor for Bertelsmann as a whole. In our view, Afya meets all the criteria we define for investments at Bertelsmann. First, the company is growing fast: it started very small and has been growing at an average rate of more than 80 percent per year since 2017, both organically and through acquisitions. In 2020, Afya generated around 200 million euros in revenue, and we expect strong growth in the future as well. Secondly, its profitability is impressive: Afya boasts EBITDA margins of more than 40 percent and has proven to be very resilient despite the economic crisis in Brazil and now also the Covid crisis. Third, Afya is an increasingly digital business. Afya’s many traditional faculties still form its core. They are spread across 18 states in Brazil and have a combined enrollment of about 35,000 students, of which approximately 13,000 are medical students. Afya’s mission, however, is to accompany physicians along their entire career path. This ranges from pre-med studies to digital services for physicians in private practice. In all, 220,000 students and physicians use Afya’s digital services, and this area is to be further and significantly expanded. Incidentally, the digital learning solution, Medcel, benefited Afya during the Corona pandemic, when universities were unable to offer in-person lectures.
Other specifications for investments are the possible internationalization and diversification of Bertelsmann’s portfolio. How well does Afya fit into the picture here?
Shobhna Mohn: Very well. Afya’s focus on Brazil strengthens our position in Brazil – alongside Penguin Random House, BMG, Arvato Financial Solutions, and Arvato Supply Chain Solutions, which have been maintaining and expanding their presence there for years. Its focus on education makes Afya a perfect match for the fifth investment criterion: diversification. Thus, in addition to the Bertelsmann Education Group’s education business, with Relias and Alliant we now have a strong foothold in Brazil for both education and healthcare, which fits well with Bertelsmann’s overall strategy. We will work with the Bertelsmann Education Group to further expand Afya.
How did this investment by Bertelsmann Investments in Afya come about in the first place?
Shobhna Mohn: Afya is a good example of how we design BI’s investment strategy long-term. Essentially, we pursue three goals at BI: First, we want to expand our network and expertise, both in the various regional markets in which we are active and in terms of digital developments that are of interest to us. Second, we are positioning Bertelsmann in the markets that are relatively new to us as a long-term investor that provides strategic support for business development, regardless of how large our stake in the company is. And third, of course the aim is to achieve a good financial return on the capital invested. In addition, we try to identify a few strategically relevant investments, such as Afya, in order to maintain or expand our share in these companies. In 2014, Bertelsmann Investments had partnered with Crescera Investimentos to become the main investor in launching the education fund Crescera Educacional II, and then played a formative role in developing the strategy for this fund. Among the companies in which Crescera Educacional II invested at the time were the two education companies NRE Educacional and Medcel, which were merged into Afya in 2019. That same year, Afya made its stock market debut on New York’s Nasdaq and is now worth about $2.5 billion. The fact that we have now been able to acquire shares in Afya directly – the share previously held by the Crescera Educacional II fund – is due not only to the commitment of local management in Brazil, but also to the personal support of Thomas Rabe and the entire Bertelsmann Executive Board and Supervisory Board, who were convinced of Afya’s potential. An investment like this can only succeed if many factors fit and, above all, if the timing is right. Over the years, we have had repeated opportunities to acquire a stake in Afya directly, but the timing wasn’t right at the time. Now, however, it is, especially in view of Bertelsmann’s good financial situation. We now hold 25 percent of the capital shares, but 46 percent of the voting rights, so we can actually co-control Afya and develop it further together with the Esteves founding family, which holds 24 percent of the shares and 45 percent of the voting rights, and the management.
Afya is just one of the many investments made by Bertelsmann Investments, albeit a very large one. How do the others and BI stand overall?
Shobhna Mohn: This year, Bertelsmann Investments is already averaging two investments or divestments per week. Most of these are in China, where our largest fund, Bertelsmann Asia Investments (BAI), is active. Our investment activities began in 2006 with the founding of BDMI, followed by BAI in 2007 and India and Brazil in 2012. To date, we have invested a total of 1.4 billion euros in around 380 companies. Along the way, we have been able to gain a great deal of expertise for Bertelsmann, both regional expertise, and expertise in the business areas relevant to us. In addition, we have already recovered more than 70 percent of the capital invested through exits and disposals. And together with the 270 or so companies in which we still have a stake, we have achieved well over twice the value of the capital we originally invested. It is perhaps worth mentioning that of the total of 380 young companies, 16 have succeeded in going public, for example in Hong Kong or New York. And 16 of our current 270 investments are “unicorns,” companies that are already valued by investors at more than one billion US dollars. And we manage all of this with a relatively small core team of around 50 people at Bertelsmann Investments, most of them in the respective markets in the U.S., China, India and Brazil, but with support from the Corporate Center in Gütersloh, especially on issues such as taxes and law.
You’ve already talked about Brazil…How are the investments in India developing?
Shobhna Mohn: We have been active in India since 2012, but development has accelerated significantly once again, especially during the Corona period. It is amazing how much venture capital is available today and how many entrepreneurs with good ideas are there, so this market has gained a lot of intensity. Our portfolio in India looks excellent, as evidenced by dynamic operational developments, very good valuations and well-known co-investors in our investments. Incidentally, private training of doctors, as in Brazil with Afya, would not be possible in India due to regulatory restrictions. On the other hand, we have been involved from the outset in Eruditus, a global provider of executive education that works with top universities such as Harvard Business School, Columbia Business School, Cambridge University and MIT. Eruditus currently supports around 60,000 students in courses such as “Executive Leadership”, “Business Analytics”, “Digital Business Leadership” and “Design Driven Leadership”. Eruditus is growing strongly and is very interesting for investors, so that the company was recently valued at more than three billion US dollars. After closer examination, we decided to sell our stake in the company step by step at a very high profit. In the long term, I see two interesting themes for Bertelsmann in India: Education and Logistics. The e-commerce service provider Shiprocket, for example, in which we already have a stake of more than 30 percent, is in a pretty solid position, so we could accompany its development for a long time.
In 2019, Bertelsmann Investments started focusing on Africa as well, and Southeast Asia was added in 2020. What is the development here?
Shobhna Mohn: Entering markets that are new to us requires a long lead time, as we observed in China, India and Brazil as well. In addition to the core growth regions, since 2018 we have expanded our focus to Latin America, Africa and Southeast Asia. Here, we also aim to understand the market dynamics, position ourselves as a preferred partner and create long-term investment opportunities. As a global venture capital fund, we look at future “hotspots,” and for us these are Africa and Southeast Asia, where the markets are really gaining momentum right now. Here, it is important for us to get in early and closely monitor developments.
... and what do you have to do to get in early?
Shobhna Mohn: Unlike in China, India and Brazil, we do not have our own local team in Africa and Southeast Asia; instead, we work here with so-called “fund-of-fund” investments. This means that we invest in other investment funds that know the local markets and have the necessary expertise. In this way, we can obtain knowledge about these regions with little capital and little risk. In this way, we have learned that the “hotspots” of particular interest to us in Africa are Nigeria, Kenya, South Africa and Egypt, where there is some venture capital activity. So far, our investments in Africa have been through the Partech investment fund, in which we have been a shareholder since 2019. But we are in the process of investing in two more Africa funds to expand our portfolio and network. In China, India and Brazil, by the way, we also started with two to three fund-of-funds investments, built up expertise, identified the themes and partners, and then successfully invested directly as well.
... and in Southeast Asia?
Shobhna Mohn: Bertelsmann Investments has been active in Southeast Asia since the beginning of 2020 with a fund-of-funds investment, the Vertex Ventures Southeast Asia & India Fund IV. This fund is part of Temasek, the Singaporean government’s investment holding company set up to support companies with good growth prospects with capital and thus advance the economic development of the city-state. Vertex SEA & India IV has already made 23 investments in the region. With Vertex, we have a well-known and very well-connected partner in the region. We are currently in the process of investing in another Singapore-based fund to expand our portfolio and network. Here, too, we will initially stick to our fund-of-funds strategy. We can already observe from initial findings that the city-state of Singapore, although only a small market, is highly developed and offers a very good base for the region. Other Southeast Asian countries of interest to us are Indonesia and Vietnam. The latter is currently benefiting from a partial relocation of production facilities from China to Vietnam. In a second step, we could then also take a closer look at Thailand, Malaysia and the Philippines.
What are the next developments we can expect to see at Bertelsmann Investments?
Shobhna Mohn: Of course, we want to accompany Afya successfully, consistently pursue investment opportunities in all the countries, broaden and deepen our know-how about the regions as well as about the technical and business developments, and, if things continue as they are, achieve excellent returns as well. We would like to identify and accompany one or two more companies like Afya – and here, timing is key. We are very busy on a day-to-day basis, but at the same time we’re patient and have a long-term perspective.
