Kaizen is a private equity fund focused at investing in India’s education sector. Sandeep has more than 15 years of operations management, investing and nurturing experience across technology, real estate and logistics sectors. Most recently he has been the Managing Director of a $400 million real estate development fund in India called Milestone Fund.Sandeep has a MBA from Stanford University, a MSc in Civil Engineering and Operations Research from University of Delaware and a Bachelor of Engineering from Indian Railways Institute of Engineering.
Kaizen Management Advisors
Why betting big on the education sector?
From pure commercial sense, this is one of the largest capitalized spaces in the country. It is one of those most obvious places where there is significant demand and supply gap which is increasing both in quality and quantity on a yearly basis because the current infrastructure doesn’t sufficiently provide either the quality or the quantity of education needed in India. And from a more personal perspective, if I were to look at the next 20 years of my working life, I have to do something meaningful. In my opinion there is nothing more meaningful for India at this point than educating
There is a lot of opportunity for investment in education infrastructure but education, per se, is a tightly controlled area right now. Doesn’t that bother you?
Sure it does. It is definitely an important area for us to look at and be concerned about. However, education is not just higher education, colleges and schools. Education goes beyond that and includes activities such as preschools, which are not regulated, corporate training, teacher training, vocational training, tutoring, test preparation, ICT, and learning management systems (LMS). Even within this, there are opportunities to provide services in a manner that may be for profit but not profiteering. As long as you are providing services of the right quality, and a not-for-profit entity wants to hire your services, then that is good enough. So I think there are opportunities to look at.
Giving you some examples of the trends we are seeing in the market, which are very heartening; there are three bills which we expect to be looked at very seriously in the upcoming sessions of the Parliament. One is the Foreign University Bill, which is a step in the right direction. Another is related to accreditation that is likely to be privatized. When that occurs, it makes a whole lot of difference towards the quality of education and takes away some of the bureaucracy that is involved in the entire core education, especially higher education. The third is the education tribunals. When we have that, it is going to be much more localized, privatized system supported by the public backbone. So these are the large changes that are likely to move our system in the right direction.
Are you looking at early stage ventures as well, or is it only going to be growth capital that will come from your side?
We are primarily looking at the growth capital. However, in certain situations, where early stage venture does make sense and helps create value for our investors, which are beyond the revenues, we will consider. Let me explain. Suppose we invest in an early stage company. Three years down the line, the revenues are Rs 50 crore. It may have been that we had invested in the same company at a later stage. But at the point of Rs 50 crore, you can value the company at a certain amount. But that valuation, often, will be driven by revenues if there are multiple competitors in the market. If there are not multiple competitors in the market and if there are two or three good-quality players of that size in the market then the valuation at that point need not be driven just by the multiples and the traditional revenues, etc. It can be, at that point, driven by the scarcity of having those companies exist at that level.
Have you already made investments?
We are looking to make our first investment in a company that would be providing services to schools. It will be the company that will be in collaboration with a foreign education provider, which is establishing its India operations in partnership with our portfolio company.
Are some pure-play Indian companies on your radar as well?
Absolutely, there are Indian companies on our radar. This is an Indian company where we are investing and it is a vocational training company. It has been in the business for many years, has generated good revenue and grown. We are looking to take it further up on the growth curve. There are quite a few pure-play Indian companies that we are looking at.
How big is the fund?
We have two pools of investments under management. First, we have a domestic pool that is being raised by the investors in India which is at Rs 300 crore. The second one is doled out from Mauritius for investors abroad and that is $120 million.
Have you set yourself a time frame for investments in India or you would wait for only good opportunities?
It is very difficult to come up with an answer and look back later in hindsight and regret it. There is no compulsion for us to invest a single dollar. However, there is a reason. We have asked people to lock away money and allocate it towards our fund. We have a duty to pick a strategy that we believe will support our thought process of making eight to ten investments over a period of three to four years. So we have allowed ourselves a pace of two to three investments a year, which is a healthy pace. It is not too aggressive so that we can spend enough time investigating each company, figuring out whether it has the business performance potential to improve or not, and whether it aligns with our abilities. If it doesn’t, we don’t have a compulsion. At the end of the day, even if we don’t invest 20 percent of the fund, I will not be dismayed because I would have done our investors good service by investing only in those companies that made the best sense for us.
Isn’t it disadvantageous to be focused on one sector?
When you talk about investors looking at two or three sectors as part of their portfolio often those investors find that because they focus on many sectors, it becomes an oxymoron. You can’t focus on two or three, especially if you focus on private equity. PE is very different from mutual fund investment. Mutual fund is all about investing for growth, growth and growth. It’s about investing in the fastest-growing companies, irrespective of the sectors.
If you apply the same today to PE it is a cyclical business. Every business and every sector goes through cycles. Unless you are deep into the sector and the business, you will miss the cycles and the business evolution. Being focused really means being focused. If I were to say to you that I am keenly focused on just the school management phase, it would be silly because that would be too focused and not diversified enough. But we are focused on a sector which has got 25 sub-segments, out of which 12 sub-segments are greater than Rs 2000 crore in size today, some of which are growing faster than 20 percent year-on-year. It is a well-diversified enough segment and there are sufficient correlations within the various sub-segments with non-education businesses. For example, if you look at IT training, it is more related to the health of the BPO market than to the education market itself.
What’s your investment strategy?
We believe the time has come for Indian private equity market to look at an industrial investment strategy or an operations-oriented value addition investment strategy wherein the private equity investors (us) look at the company from the objective of figuring out the potential of unlocking value. The first thing that we have to do is to review the business performance improvement potential of the particular entity that we are investing in. To have the understanding of that potential, we need to know the sector and the various sub-segments within it. Therefore, the team we have crafted is the set of people who understand the sector and the segment and have built across sectors and have built companies within the sector, as well.
There is a three-way exit opportunity for us in this. We are happy to invest in companies which are about Rs 10 crore to Rs 40 crore, help them grow to a point where they have better corporate governance and better policies; grow the revenues to Rs 50 crore or Rs 100 crore; then exit by selling our stake to a larger investor or sell the company to a much larger buyer, who are many in the company today. If there is a possibility, we would like to come out with the company's IPO. We are looking at some companies which have Rs 200 crore in revenues as well. They will be good IPO targets when their revenues exceed Rs 400 crore-Rs 500 crore, and they have consistent profitability.
The public-private partnership in the education sector is picking up. Are you willing to tap that area too?
We believe that our portfolio companies will be looking into the public-private partnerships as an area for getting revenues for themselves, specifically in employability and in providing services to the schools. There are the areas we are bullish on in that order. In the employability area, where quite a few bottom-of-the-pyramid contracts are being given out by the government, starting with rural employability schemes and ITI revamping schemes, those two are the most obvious. I do believe that our portfolio companies have the ability to play in those two areas. Also, there is a bit of an impasse on handing over schools to private players on a management basis. I see some of those things becoming a reality in a year or two and that will be important for our portfolio companies to look at.
written by Surinder Singh Saroha, May 20, 2010
written by Surinder Singh Saroha, May 20, 2010
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