DSA Summit Exclusive: Kaizen PE eyes 2nd close of $125m fund soon, plans 3 more exits by Dec

Education sector-focused private equity (PE) firm Kaizen Management Advisors Pvt. Ltd is set to mark the second close of its new $125 million fund in the next few weeks.

The South and Southeast Asia-focused investor had hit the first close of its second fund—Kaizen Private Equity II—at Rs285 core (about $42 million) with five investors that included institutions and strategic education companies.

For its second close, Kaizen is aiming to reach over $70 million, with the target of closing the fund at $125 million early next year.

Kaizen has made one investment so far from its second fund in Hyderabad-based INSOFE (International School of Engineering), a professional skills training firm with a specialization in data sciences/big data analytics. It is targeting to invest in 9-10 companies from its latest fund.

In an interview with DEALSTREETASIA at the sidelines of its flagship Asia PE-VC Summit 2017, Sandeep Aneja, Managing Partner at Kaizen, talked about investing in the education space and the plans for the latest fund. Edited excerpts:

How do you view the current investment climate in India and other parts of Asia?

India is still one of my favourite places to invest in. I think it was overhyped that investing in ASEAN or other parts of Asia, is easier or better than investing in India. The challenges are very similar. India has the most proprietary deal flow and GPs in the south east Asian region, particularly for us. There’s a faster growth of entrepreneurs in India than any country in Southeast Asia. We get much more exciting companies in India than any other place in Southeast Asia.  A lot is spoken about how the valuations in India are high, but the valuations in Southeast Asia are not low either. There are pockets, for example, in Vietnam where the valuations are super high compared to even India. In India I can get good quality deals in under 10x EBIDTA and can have a great conversation with entrepreneurs at 7-8 times. In Vietnam, no one will even give me a second meeting at that level, which is unfortunate because everyone talks about Vietnam, but no one wants to invest in Vietnam, they want others to put in the 13-17 times, but they will regret it as education sector doesn’t support a 13X in the long run. So, since we are a multi-country fund, we can pick and chose which country we want to focus on. In India, one challenge is finding good quality middle-level talent whereas in Southeast Asia, the middle level has greater depth. It’s more expensive, but it’s worth it. In India it’s really hard.

For your fund, is there a country-wise allocation that you’ve thought about?

Allocation is much more from a guidance perspective. It makes very little sense for us to go more that 30-35 per cent in any country, except probably India, where we could go more than 40 per cent. We want to go into a country where we can make at least two investments. In a portfolio of 8-10 companies, no country should be less than 15 per cent, that’s from an effort and bandwidth perspective. If I have a single asset sitting in Philippines and the other 9 are sitting elsewhere, then it becomes a stray asset, which I cannot have. Therefore, I should be looking at some concentration as well.

Within Southeast Asia, which countries are you targeting?

I see quite a bit of opportunity in Thailand and Vietnam as well. And we’re seeing quite a bit of opportunity in Singapore entities as growing into the region. India of course we spoke about and some in the Philippines.

What is the status of your fund?

We will have the final close early next year. We have at least 12 months since our first close, and we are conducting a second close now in which three-four new LPs are coming in, so we will have a decent second close. It’s still in the process and we are doing legal documentation so it could take 30-60 days.

What is your target for your second close?

The first close was $45 million, the second close would be around $70 million or over that. Final should be around $125 million. We have a good pipeline, we have conversations going on, we’ll get there.

How many investments are you planning to make from this fund?

We will make 9-10 investments out of this $125 million fund. We’ve already made one.

Education as a sector hasn’t really proved itself in terms of exits in India, you have about 6 in the pipeline?

We’ve got three already and should have three more by December. Two have been signed and one is in the process of being signed. We can’t name them but we’ve had one full exit and two partial exits. We are having one full exit again and two partial exits and we have a confirmed exit on top of that, so seven companies we are at some level of exits out of ten.

What are the returns like? Are they at par with what you expected?

They are at par, but some companies haven’t done as well as expected because the dollar depreciation has hurt us to the extent of 4 per cent IRR. However, no exit has been less than 20 per IRR. That’s all I can tell you.

The exits that you got, were they more India focused?

Our first fund was focused on India, so all the exits are from India right now.

How do you view the next couple of years for India and the Indian education sector?

I think you have to be pragmatic about investing in India, so I don’t have a strong macro-view on the strength of the sector. The way we view this sector is from a very bottom-up approach. We have, within this sector identified multiple sub-segments where we invest. For example in India, we have made a couple of investments in the K12 segment in the previous fund and in this fund we will not make a single K12 investment in India. We made two play school investments in India from the last fund, we will make one investment in that segment this year. Also, we will take the top two of our investments from the previous fund into this fund. We have to do five investments in India, we’ve done one and we’ve got two from the previous fund coming up, so I’ve got to do two new investments in India, and I’ve got five years. So, we can pick and choose and we know the spaces that we want to invest in and we’re looking at those spaces very actively.

Which are the sub-sectors that you are looking at?

For example, one space which is very exciting is of course education technology in India. There is an opportunity for us to invest in professional skills in Asia, that’s a great opportunity, because people are finally realising that the degrees they got are great on paper but they don’t have the skills, and people are willing to pay for skills in Asia now for the first time, earlier they did not want to pay. We set up the NSDC and all in India, but they didn’t work out, because a lot of people didn’t pay. So, that’s a great area of focus for us. We like pre-schools and ed-tech quite a bit. We like test preparation quite a bit, within that we like peer-to-peer learning. I think we are going to the next level of detail in every segment of investing in those growth areas. In Southeast Asia we will invest nothing in ed-tech. It’s not very exciting, but there are some companies that have done well, for example virtual class teaching it may not be exactly about education technology but more of a distance learning or a live learning programme, that we are willing to do, because there is a strong amount of dispersion of population here, which doesn’t have access to decent English learning, so we could do that.

How about for Southeast Asia, how do you view the next one year or so?

I think there are a lot of investors in Southeast Asia, who are willing to pay a very high multiple for education assets. Every deal that I see in Southeast Asia is banked, there is a banker attached to every deal. So we will participate and look for opportunities in those spaces for sure, and I think there will be a lot of activity in those spaces in education for sure and I think there will be a lot activity in education in the region. We are looking actively at proprietary deals in the region and we have a few and we will be announcing a couple before March.

Also Read:

India: Education sector-focused PE firm Kaizen marks first close of second fund

India: EduPristine raises $10m from Kaizen, US education firm DeVry