Kaizen Private Equity (Kaizen) is India’s first private equity fund focused on the fast growing U.S. $86 billion education sector. Founded in 2009, the fund raising activity started in 2010 after the Kaizen team came together. Since then, Kaizen has achieved a first closing in India and has received commitments from international institutional investors. In this interview, Sandeep Aneja, the founder and managing director of Kaizen, shares with Poornima Kavlekar, the company’s investment strategy, challenges and opportunities in the education sector.
What is the thought process behind Kaizen’s single minded focus on the education sector?
We believe that operations driven, sector-focused private equity funds bring better value for investors. Additionally, education is a non-cyclical industry that provides high returns for investors, while making a social contribution. This combination of a true, double bottom-line benefit, is attractive to Kaizen and therefore, a sector focused fund.
The education segment is categorised into core, parallel and ancillary with core forming the majority of the market size with U.S.$ 30 billion, according to your report on education sector. What kind of opportunities do each of these segments present to an investor?
Each of the following education sub-segments highlighted (in the box – see next page) are in excess of Rs. 2,000 crore in size. Thus, there are large investment opportunities across the core, parallel and ancillary sectors for an investor.
What are the challenges this sector throws open for investors?
The various sub-segments of this sector present different challenges to investors and also, different opportunities. For example, in the core education segment, investors face the challenge of real estate and regulations. Additionally, there is the related challenge of scalability. In parallel education, vocational training is beset with the problem of identifying the customer with the ability and willingness to pay for skills-based training.
Are there any changes that you think need to be made to the government regulations in the education sector?
The government has enacted numerous regulations that clarify and empower the involvement of the private sector in measuring and delivering quality education. CRISIL’s recent undertaking to rate business school programs is one such move by a private entity. Two additional changes that would help from an investor’s perspective are putting in place regulations to measure and enforcing on-going quality and not just licensing requirements. In addition, it would be useful to have a concerted effort to bring together both public and private parties to build a sustainable ecosystem. India is a diverse country and no one size fits all and that is true for education as well.
How will The Foreign Educational Institutions (regulation of entry and operations, maintenance of quality and prevention of commercialization) Bill (if passed) change the overall education sector in India? And what will be its implication on the investment ecosystem in the Indian education sector?
There will be change in the overall education sector. The Bill supports institutions of high repute to enter India, thereby ensuring enhancement in the overall quality of mainstream education. This apart, foreign institutions (especially U.S. institutions) will bring in their research capabilities which is lacking in Indian institutions. There will be an upgradation and training of teaching staff.
An important result of foreign institutions offering degrees in India legally will be, a more affordable education for middle and lower middle class students, who cannot afford an overseas education and who will benefit immensely from a lower cost, good quality foreign degree, which is universally acceptable.
The Bill also mandates public disclosures on infrastructure, number of teachers, syllabus and fee, thereby promoting greater transparency and enabling students to make better decisions in terms of choice of institution and courses. The section on dispute resolution through the National Education Tribunal, along with the definition of penalties for misconduct and misrepresentation of information pins greater accountability on the institution.
It is believed that foreign institutions will greatly enhance the profile of higher education in India. This is due to their experience they have over the years in providing quality education through systems and processes that are in place.
Another thought that is compelling is that of emulating the community college system in the U.S., which is a very good example of an affordable, quality vocational education provided to the student population in the middle of the pyramid for skill based learning.
The Bill aims at capacity building and further stresses the importance and need for private players and foreign institutions playing an important role in bridging the enrolment ratio gap. The Bill is expected to stem, if not stop, the flow of billions of dollars being spent by Indian students going overseas to study. This could change the investment ecosystem.
What are the factors you look for before investing in a company?
We seek investment opportunities in companies with strong fundamentals and the potential for organic or acquisition-driven growth. We invest from U.S.$5 to $15 million of equity over the life of each company, depending on the strategy and capital requirements of the business. In each portfolio investment, we apply a growth-oriented approach while leveraging our deep industry knowledge. When selecting prospective investments, we emphasise on differentiated product or service, defensible competitive advantage, recurring revenue model, diversified customer base and a strong management team with a proven track record.
How does Kaizen engage with a company it invests in? Do you get involved operationally if needed?
We believe that the target companies in the Indian small and medium segments of the education sector have strong entrepreneurial capabilities and are able to achieve a successful business model upto a particular level. However, in order to achieve the next level of growth, significant business building capabilities are required (such as strong management teams, increased operational efficiency, business development, governance, strategic inputs, etc.) which are usually missing.
We adopt a two pronged approach to add value to portfolio companies – ‘First 100 Days’ and ‘Operations Value Addition‘. In the First 100 Days plan we focus on identifying specific areas that require urgent attention, post investment. Through this approach the focus would be on low value and low effort changes in the early days of investment to energise the company by instilling a sense of dynamism and momentum to the business.
Our Operations Value Addition approach focuses on areas that require heavy lifting and can create a large impact on the net income of the portfolio company. Our team, in consultation with the management of the portfolio company, would create a road map for a period of three to four years for value creation.
IFC plans to invest in Kaizen. What are your plans with these funds? Do you have any specific type of company that you are looking at in this sector – a startup or a growth stage company?
We would like to invest our fund in 10 to 12 companies over the next three to four years. We are finalising one investment and two more are expected this year. We prefer to invest in growth stage companies promoted by individuals with a passion for and understanding of the sector, especially, when investing in the core segment. Of the 10 to 12 companies, one may be a startup investment.
What are your plans for 2011?
In 2011, we plan to close the fund and deploy 30 to 40 per cent of the fund toward three to four companies.