Sandeep Anjea of Kaizen Private Equity believes that any significant improvement in the quality of higher education in India can come only through the entry of foreign universities

Kaizen Private Equity is India’s first equity fund focused on the education sector. The company, set up on the initiative of parents, is focusing on improving the quality of education in all areas. In an interview to Moneylife, Sandeep Anjea, founder and managing director of Kaizen Private Equity, discussed different aspects about investment in education, the changing trends, regulatory hurdles and expectations from the sector. Excerpts from the interview.

Moneylife (ML): The K-12 segment (kindergarten to class 12) is said to be a $20 billion business, according to your report. Would you tell us more about the report, the findings, research methodology and the different aspects of investment in the education sector?

Sandeep Aneja (SA): When we looked at education, we understood the structure and core of various sub-segments. Each segment is unique and different. Each school has to deliver quality education. It gives a high return on profit and loss account compared to technology companies, who sell the services to schools. The technology companies’ main foundation is sales and marketing.

In our report we have studied the different areas of the education sector, namely core education, which consists of K-12 and higher education; parallel education segments comprising pre-schools, tutoring, test preparation, vocational training; and ancillary education segment which consists of multimedia and ICT, books and stationery. These segments were studied using parameters like investment, returns, scalability, barriers to entry, regulation, market size and pedagogy. The investment, pedagogy, market size of core education is higher than in the parallel segment, where it is medium, and the ancillary segment where it is low.

Investment in education is questioned when new opportunities emerge and new investors wish to invest, mainly for two reasons—regulation and real estate. The investment can be made by debt, which is granted by the bank against assets. This works most of the time. Companies with heavy balance sheet having high assets also invest in the sector as they can hold and control stakes. A third way is equity funds, where items within the purview of regulation are avoided while investing.
Funds which are big in size and have high return percentage mainly invest in the real estate of the education institute.

ML: Which companies has Kaizen invested in? What do you look for when you invest in a particular company?

SA: We are in the process of launching our first investment. As per the policy of our company we won’t reveal the name of the fund. While investing, the most important thing we look into is the promoters’ quality. It has to be very high in terms of service, governance, quality and past records. We look for companies having past record of investment in the education sector and a promoter having a good past record in the core education segment. We won’t invest in companies with low revenue and those who are in an early stage. Though, we can provide them professional advice.

ML: Through 2010, investors have been waiting for reforms in the education sector. What kind of reforms can we realistically expect?

SA: Education is a concurrent matter. There may be reforms at the central level but at the state level there is not much movement. We are expecting few reforms like the states to come up with a Private Education Act. Maharashtra is working on it now; earlier it was only in nine states, but we expect more states to come up with it. There are other reforms like increasing the reservation for the government’s Sarv Siksha Abhiyan up to 25%. Karnataka is a fore-runner in this.

We are expecting implementation of the Educational Tribunal Act, which will ensure curbing corruption at the local level. There are expectations that the National Commission for Higher Education and Research will be formulated with focus on managing capitalisation.

We are expecting the development of the curriculum of the Central Board of Secondary Education (CBSE) as many states are adopting its syllabus. Going by the market movement, currently there is a huge demand for CBSE. We are also expecting the implementation of The Foreign Educational Institutions (Regulation of Entry and Operations, Maintenance of Quality and Prevention of Commercialisation) Bill.

Further we are expecting clarity on distance education, school education and digitalisation which will ensure governance and reduce paper work.

ML: Regulatory issues have been identified as a hurdle by many private equity players in the education sector. And the investment is mostly done in parallel/ancillary services in education, like coaching classes and test preparation, pre-school education, vocational training and books. Do you think this is likely to continue in the coming years or will things be smoother for PE players?

SA: Going by the data, the investment in core education has increased by seven to eight times. This trend will continue in the future as well. The investment is done in terms of school management, distance education and many other areas. Earlier, there was repeated investment in one particular company. Now, private equity funds have started to invest in new and fresh educational companies as well. This is the ‘new silk route’ and we will look at this opportunity.

ML: One such issue is the law specifying that schools can only be run by trusts or institutions that are ‘not-for-profit’. This has not prevented a number of players from investing in the sector. What is your view on this?

SA: Our view is to avoid investing where regulation is an issue. Investment can be done in companies that are providing services to schools.  Investment in assets like real estate also comes under the regulatory scanner and we don’t see any exit on that. Again, that is better avoided. Other than this, related party transactions should be minimised as we don’t want the same party to run the trust and the company.

ML: The Foreign Educational Institutions (Regulation of Entry and Operations, Maintenance of Quality and Prevention of Commercialisation) Bill is one of the highly-awaited reforms in the sector. What are the implications if this is passed?

SA: Once the bill is cleared there will be a line of foreign universities setting up campuses in India, in partnership with local universities. The universities from the UK, the US, Australia are coming to India for recruitment, as for them a foreign student (here an Indian student) is a net profit when compared to a student in their native country. Basically they come for revenue opportunities.

Once the bill is passed this will be changed and the universities will come to set up research base. The research base then will no longer be a repeatable process like Business Process Outsourcings (BPO). It will be a non-repeatable process for the universities emerging from Asian countries. India has clearly emerged as the potential candidate but it lacks in research institutes. Many foreign universities (may be around 35 years old) will set up campuses here, for mere expansion. Others will come only for revenue and expansion, compromising on quality of education.
There is a lack of good quality generic education in India. And with the entry of foreign universities, students will be offered specialised courses and the choice will be wider. Such courses can only be imported, it can’t be created here. The know-how has to be imported.

ML: Earlier, you had mentioned that you might consider working in a public-private partnership to target the middle class market. Is there any progress in this direction?

SA: It is up to our portfolio company. We can guide them on targeting the middle class market, which is the largest segment. We think that the public-private partnership (PPP) should be emphasised. If there is good fund disbursement in PPP and high transparency, then it is good to opt for PPP. Also, there is no margin gain in it. Recently, the Planning Commission announced that infrastructure and the social sector are to be focus areas in the forthcoming plan. So, clearly, education which is a part of the social sector will also be carefully looked at by the government.

ML: Given the escalating rise in the cost of education, will private equity end up making education even more expensive by emphasising the bottom line?

SA: I vehemently oppose this view that cost of education is high in India. It is actually cheap here compared to other nations. In the US, a student from a public-supported school ends up paying $10,000-30,000 for free education. In the UK the universities have increased the fees by three times.  The returns from investment in the social sector are long and amorphous, so more is invested in something physical like roads. Free is not good. There has to be some amount, even if it is very little, to be paid by everyone as education fees which will ensure that people actually respect the free education given to them. Many people depend on the government for basic education for their children, which is good, but there should also be responsibility on the part of parents. One cannot solely depend on the school authority and teachers.  

Many of the institutes don’t follow the sixth pay commission and teachers aren’t paid adequate. Unless they are paid sufficient, there won’t be quality education.  Going by the current market sense, masses can afford to invest more in education, which of course will get quality education.

Community-supported schools in the past have done well. If more such schools come up, they will do better. Each community should start their own school through which they can carve their own niche.  

ML: How has the experience of Kaizen been? What are your future plans?

SA: The experience has been very good. Most of us are parents who started this fund; so we picked up the education sector over others, with the aim of emphasising on quality. Many invest in the education sector either for revenue, or for change, or for both. We believe in the third option, revenue and change. The private equity funds are a very minuscule part of the education sector to bring any change. Like I said, we are in the process of our first investment and by calendar 2011 we will have three investments.