By Exec Edge Editorial Staff
Dubai-headquartered GEMS Education, one of the world’s largest operators of private schools, has drawn recent attention for attracting a substantial investment from a consortium of investors led by Brookfield Asset Management, an arm of Canadian alternative-asset firm Brookfield Corporation, which holds more than $900 billion in assets. This came after 2023 talks between GEMS and Abu Dhabi state-backed entities broke down because the two sides could not agree on valuation; GEMS had reportedly sought to value the firm at $6 billion.
The Brookfield investment allows CVC Capital Partners to exit its 30 percent stake in GEMS, which it has held for the past five years. Brookfield did not release the size of its investment in GEMS, but Bloomberg has reported that Brookfield was looking to invest up to $2 billion.
GEMS boasts large annual revenues and many of its schools achieve high marks from educators and parents. GEMS became a strategic partner of the Clinton Global Initiative in 2010. But a deeper look into GEMS shows that the schools and its numerous subsidiaries operate within a Byzantine corporate structure. A GEMS Cayman Islands and a Swiss subsidiary have been declared bankrupt. Lawyers for the billionaire chairman of GEMS told a judge in 2012 he could not make good on a $1.4 million debt. The demise of GEMS flagship school in Switzerland has led to a sudden closure, leaving students and parents grasping for placements in other schools.
GEMS began as a single school in Dubai, founded in 1968 by Indian-born teachers Mariama and K.S. Varkey for children of ex-pats who had come to Dubai for work because local schools in Dubai accepted only children of natives.
Dubai authorities demanded the school be housed in a facility built specifically for it, so the Varkeys’ son, Sunny Varkey, took over the school and expanded, adding new schools. In 2000, Sunny Varkey established GEMS and grew outside of the Gulf region, adding schools in the U.S., the UK, India, Africa and Southeast Asia. GEMS now claims 49 K-12/13 schools in the Middle East, and a total of 170,000 students in around the world.
The group’s GEMS MENASA entity includes 44 schools in the UAE and two in Qatar and 17 Bellevue schools. It is characterized by Fitch as having good liquidity and strong profitability, albeit with high leverage. In July of this year, GEMS said that the Brookfield investment would be made into the profitable GEMS MENASA entity.
All of the Varkeys’ education assets operate under the Varkey Group holding company, founded in 1970. Shares in Varkey Group are held in trust by a private trust company for the benefit of the members of the Varkey family. Prominent individuals include Cherusseril Narayanan Nair Radhakrishnan, Dino Varkey, Jay Varkey, Sunny Varkey and Sherly Varkey.
The Varkey Group has been involved in other education businesses besides GEMS Global Schools that have not worked out.
The Varkey Group invested in Dubai’s International Horizons College in 2014, but the school went out of business in 2016. The Varkey Group invested in Chennai’s Everonn Education in 2011, but the business went into liquidation in 2016, as GEMS and other investors battled over allegations of misappropriation of funds.
When GEMS sought to expand in Switzerland, home of some of the world’s most elite private schools, a Luxembourg-based investment fund, Meigerhorn, agreed to build GEMS a school complex in Etoy, Switzerland, specifically designed for the school’s needs, in exchange for long-term lease payments from GEMS.
Meigerhorn leased the property to GEMS World Academy SA, the subsidiary set up to run the new school, for 30 years. The initial tenant was another subsidiary, GEMS Global Schools Limited, which is registered in the Cayman Islands, and was the guarantor of the lease.
The state-of-the-art school opened in 2013, educating students from ages 3 to 18 for between $30,000 and $40,500 per year. It was meant to accommodate 2,000 students. However, enrollment topped out at 340.
In the second quarter of 2018, GEMS World Academy SA stopped paying rent. The school closed abruptly and unexpectedly at the end of the school term in June 2019 only one month after the closure announcement was made on May 29, 2019.
When GEMS World Academy Switzerland announced its closing on its Facebook page in June 2019, one commentor wrote: “Great professors, alumni and team but bad management! They all should go back to the business school!”
The school was “born of overly optimistic market analysis,” Baptiste Muller, Secretary General of the Vaud Association of Private Schools in Switzerland, said shortly after the closure was announced. “It has been struggling for years to fill its staff,” he said, adding that other private schools in the country were doing well.
At the same time GEMS World Academy Switzerland stopped paying rent, GEMS shifted assets controlled by GEMS Global Schools Limited – the guarantor of the 30-year lease with Meigerhorn — toward to its highly profitable GEMS MENASA business. For example, it sold the Bellevue group with its schools in Switzerland, UK and Qatar to GEMS MENASA for 1 British Pound. Bellevue group is within the scope of the Brookfield investment.
Meigerhorn sought to recover its back rent from GEMS. It terminated the lease agreements and initiated arbitration proceedings against GEMS World Academy SA and GEMS Global Schools limited over unpaid rent and damages.
In 2022, an ICC International Chamber of Commerce arbitral tribunal awarded Meigerhorn $71 million for unpaid rent by GEMS and damages, plus 5 percent interest and costs, bringing GEMS’s total bill to $74.5 million (ICC award number 24590). GEMS World Academy SA and GEMS Global Schools Limited challenged the decision in High Court of Justice in London but their appeal was dismissed (Case # CL-2022-000513). The award was recognized and declared enforceable in Switzerland and in the Cayman Islands.
GEMS World Academy Switzerland was declared bankrupt in December 2023. To further pursue the back rent it is owed, Meigerhorn sought the winding-up (see here) of GEMS Schools Limited in February of this year, and the Grand Court of the Cayman Islands ordered such (Cayman Islands Gazette, May 7) in April. GEMS has yet to pay Meigerhorn the $74.5 million it is owed.
The Switzerland story is not an isolated one in GEMS’ history.
In Africa, GEMS Cambridge Education opened its first Kenyan school in the Nairobi suburb of Karen in 2012, setting in motion a decade of complicated, multi-party deals that have led to school closings, liquidations and unpaid debts.
“Despite attracting hundreds of learners who have collectively paid billions of shillings over the past decade, GEMS has irked some firms it entered into contracts with as the deals have been broken, leaving debts of over Sh2 billion,” or $15.5 million, Kenya’s Nation newspaper wrote in 2023.
In the U.S., GEMS most recent troubles occurred in Chicago. GEMS World Academy Chicago operates a school teaching preschoolers to 8th-graders near Chicago’s lakefront. Yearly tuition started at $32,000 for kindergarteners. In 2018, GEMS began developing a nearby building to house a high school. GEMS invested $85 million in the project but then, in 2019, stopped paying contractors. GEMS was forced to surrender the building to a consortium of lienholders to resolve a foreclosure lawsuit.
In 2007, GEMS and Sunny Varkey announced the formation of Nations Academy, an alliance between GEMS and New York-based education firm Edison Schools to expand GEMS’ U.S. presence, picking Edison founder Chris Whittle as its CEO. According to court documents (Case # 1:10-cv-06287-AKH), “Nations was in a very precarious financial condition from the start, and by May 2008 it was readily apparent to Nations, GEMS, Varkey and Whittle that their partnership and its quixotic plans would not survive the year.”
That year, Varkey solicited a $5 million investment in GEMS from Patriarch Partners, a New York private equity firm, for preferred shares of stock in Nations Academy. Patriarch formed Emet Investments to make the investment. Emet principal Lynn Tilton joined the Nations Academy board and raised concerns about its viability. In 2009, Emet demanded return of its $5 million, plus interest. Two months later, in a settlement, Varkey agreed to return the money by May 2010. In an October 2011 affidavit, Tilton stated that Varkey had repaid the $5 million in principle, but still owed approximately $1.4 million in interest.
In 2012, an attorney for Varkey, whom Forbes says has a current net worth of $3.6 billion, argued that he “doesn’t have the liquid funds to make the $1.4 million in interest.” U.S. District Judge Alvin K. Hellerstein admonished Varkey’s lawyer, according to court filings, saying, “You’ve strung them along so long they don’t have any good faith regard for what you say or your client says.”
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