Education-focused investment firm Kaizen Private Equity, which closed its second private equity (PE) fund two months ago, is currently in the market to raise its first debt fund. It is also rebranding itself as Kaizenvest to reflect its new investment strategy.
Kaizenvest, which is stage-agnostic and focuses squarely on the education sector, has been raising capital for the debt fund since September, and is targeting to secure $50 million for the first close by May 2020, the firm’s founder and managing partner Sandeep Aneja told DealStreetAsia.
The debt fund is aimed at financing privately-funded schools that cater to children from the lowest income tiers in South Asia, Southeast Asia, and Africa. Kaizenvest is aiming to raise a total of $150 million for the fund by June 2021. The investment firm’s existing investors are anchoring the debt fund, Aneja added.
The debt fund is expected to be deployed first in markets such as Indonesia, Cambodia, the Philippines, India, Pakistan and Bangladesh. About 20 per cent of the fund, using monies from the third and final close, is slated for Kenya, Ghana and Nigeria.
Aneja explained that the team would be moving carefully in deploying the fund, given the new markets.
He sees the fund providing growth capital to about 10,000 affordable private schools across markets over four years. Aneja expects to lend about $20,000 to each school to fund infrastructure improvements and teacher training.
With its new strategy, Kaizenvest is seeking to fill a gap left by banks. Aneja said schools typically have trouble borrowing from banks unless these loans are secured against property held by an individual, usually the school founder.
The debt fund would be deployed through investments in third-party intermediaries such as India-based Varthana, which provides loans and support to the so-called affordable private schools. Kaizenvest is an investor in Varthana, which Aneja said has provided financing to some 4,000 private schools in India.
Not just a PE fund manager
According to Aneja, the expected investment return is about 10 per cent IRR in US dollars for each loan, each year. In comparison, interest rates for bank borrowers in Indonesia and Pakistan stand at around 30 per cent and 35 per cent, respectively. Separately, the schools that receive the funding will have targets linked to learning outcomes, as well as the retention of female students.
He added that, in his experience, school founders prefer debt over equity funding, as the latter option would likely entail giving up control.
“The idea is that if we give loans for the purpose of infrastructure improvement, and if you use those loans thoughtfully to drive education quality… learning outcomes get better,” he explained. “More parents line up to join your school, so your credit-worthiness goes up, your cash flows get better, which means my investment, my debt, is more secure. And I’m pushing you in the right direction from a financial perspective and societal direction as well.”
Aneja told DealStreetAsia that Kaizenvest will start raising its third equity fund in 2020-2021, with a target of at least $200 million. About 75 per cent of its second fund, which closed at $85 million at the start of October, has been deployed.
The fund has so far invested in five companies, namely Varthana, online exam prep platform Toppr, data science-focused learning institution INSOFE, Vietnamese English language school Yola and Philippine conglomerate Phinma Corp’s education arm.
Aneja said the investment firm is eyeing opportunities in Indonesia’s education sector, especially in the area of supplemental learning such as online learning platforms. Kaizenvest, he said, did look at Ruangguru, an Indonesian edtech startup we recently reported is raising fresh funding in a round led by General Atlantic, but that was four years ago, and the firm was not quite ready to step into the Indonesian market at the time.
Further ahead, Kaizenvest is looking into building a preschool business spanning Singapore, Vietnam, Thailand and the Philippines. To be funded by the second PE fund, this will entail acquiring existing, independent preschools in the individual markets and combining a dozen or so under an umbrella platform.