Mumbai: In a growing aspirant economy such as India, education enjoys pride of place among heads of expenditure in most middle income homes.
It is this spending that Kaizen—India’s first private equity (PE) fund being raised to focus on investing in education businesses—aims to tap into.
The Kaizen Education Fund I, being put together by Reema Shetty, Akhil Shahani, Sandeep Aneja and Jetu Lalvani, who together have at least 65 years of experience in education and private equity, hopes to raise $100-150 million (Rs482-723 crore).
“Education is as counter-cyclical as it gets. It’s a sector where people are willing to spend a disproportionate amount of their income to go back and reskill themselves even in a downturn,” Aneja said, adding the fund has received some commitments.
Also See PE/VC Investments In Education Companies (Graphics)
It’s indeed a hot segment, as shown in an investor survey by Chennai-based information provider Venture Intelligence. The January survey of at least 90 investors showed at least 80% of them looking to invest in education firms over the next six-eight months. Brokerage IDFC-SSKI Securities Ltd projected in January that it expects a 14% growth in private spending on education, making for an $80 billion market by 2012.
“Culturally, (Indians) want our children to be educated well. But there is not enough supply of good quality schools. There’s a huge potential there and it falls under the soft infrastructure that India needs to maintain the 10% type of growth. The problem is that there are a lot of regulatory impediments,” said Biswajit Subramanian, managing director of Providence Equity Advisors India Pvt. Ltd, the Indian arm of Providence Equity Partners Inc., a $21 billion fund that invests in telecom, media and information services segments.
He feels that for the big investors to come in, the country needs to change some of the regulatory restrictions that prohibit people from making a profit in education. Until then, “there might be pockets such as coaching institutes or distance learning institutes, which are not regulated, where you could invest,” said Subramanian.
Still, Kaizen sees itself investing the most in what is called core education that include kindergarten to class XII (referred to as K-12 in the business), colleges and universities, and vocational training institutes, segments that most other funds have shied away from, preferring instead parallel education businesses such as tutoring, and ancillary education services such as publication, online learning, multimedia, information technology infrastructure and courseware companies.
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.
What about ancillary services? Aneja says it’s an interesting segment, and promoters there are willing to give up control, but the challenge there is that rarely is it a stand-alone company, unattached to some other business in the education segment. “If it is a separate company, then it’s very small and has not grown to a point where it has become attractive yet,” Aneja said.
Envisaged to have a portfolio largely made of the core education segment, Kaizen, unlike other funds which typically exit an investment in three-five years, will have a gestation period of up to 10 years.
The plan is to create a holding company of all the companies Kaizen invests in that will see an aggregate of profits of the companies it invests in making it a viable candidate for listing on a stock exchange. Alternately, this holding company can be sold to a secondary investor. And third, if Kaizen, at any point, finds a good buyer for an institution it’s created, who shares the same goals as the fund and is willing to take it forward in that direction, it can sell.
Graphics by Ahmed Raza Khan / Mint