Of the some $300 million investments that PE and venture capital (VC) firms have made over 30 deals in the education sector from early 2005, Venture Intelligence says, “a fourth of the PE/VC investments (in value terms), have gone into e-learning segment. The K-12 segment has seen only two investments”. The deal tracker said in the report that “other segments that have attracted significant PE/VC financing include vocational training, tutoring and test preparation”.
Aneja says his fund will look at new opportunities in core education, though it’s also willing to partner with existing institutions whose thinking is aligned with that of the fund. The other differentiator is that Kaizen will look for control transactions, in which it owns a majority of the company.
“I want to make an average 35% IRR (internal rate of return) on each investment, but I also want to control the quality and destiny of the institution,” Aneja says. “We may end up making one or two acquisitions if the price is right, but primarily it will be greenfield, primarily it will have to be well-located—if not in the middle of Mumbai, maybe Pune or the middle of a tier-II city.”
Regulation in education is probably going to be the fund’s biggest challenge. Any school or college which grants a government-recognized certificate has to be a not-for-profit trust. An investment into this wouldn’t be feasible for a PE manager who needs to provide returns to his investors. But many other funds, which also invest in education, have worked around this challenge by investing into a company that provides services to the trust, and is in turn, paid by the trust for these services. Kaizen will follow a similar model.
Another challenge could be finding and retaining the human capital required to run these institutions. To surmount this, Kaizen wants to tie teachers’ pay to the success of the institutions it builds by way of profit-sharing.
A plan by Kaizen to back mainly schools following International Baccalaureate (IB) and International General Certificate of Secondary Education (IGCSE) syllabi may also come in its way of scaling up, according to one expert.
“The idea is that you should be able to build a thousand such schools. But their (IB and IGCSE) appeal will be limited to the highest segments of the population,” said Subramanian of Providence.
Aneja said the market his fund is targeting is the upper middle class market, clarifying that IGCSE has been recognized by Indian colleges since 1999, and IB since 2005. “As public-private partnerships gather more steam, we will actually go into working with the local, state and Central governments, and then we’ll go into the middle class market, which is the largest,” he said, admitting that if the business is not inclusive, the model will be rejected by the society at large.
Kaizen, unlike others such as Helix Investments that backed Mahesh Tutorials Educare Pvt. Ltd, or Intel Capital, which funded Career Launcher India Ltd, does not expect to be focused on so-called parallel education businesses because, Aneja said, it is difficult to scale once they reach Rs50-60 crore in revenues. That said, Kaizen might still look at this sector depending on the opportunity.