In April 2018, founders Aneja and Lalvani brought Nirav Khambhati, former CEO of Tata ClassEdge, on board as a partner to conceptualise, design and eventually execute an impact fund to drive change in the sector. The fund is expected to reach its first close (US $ 50-75 million) by early 2020.
The Kaizen team had noticed that in the countries where the government schooling system was failing, affordable private schools (APS) had sprung up to fill the gap. Parents preferred to put their children in schools which, though not free, were perceived to be superior to government schools. “At the APS, teachers show up, the child may speak one or two words of English at home and parents feel reassured,” explains Aneja. For the parents, it’s a bit like taking an insurance policy towards future employability, he says — they don’t mind shelling out the money today for the sake of future returns.
Unlike other businesses however, school education, at least in India, needs to be not-for-profit. Hence, accessing loans and funds for schools is a challenge. Dedicated education finance companies such as Indian School Finance Company (ISFC), Shikhsa and Varthana (one of Kaizen’s investee companies) have stepped in to fill this gap to an extent, but as schools proliferate and expand, the sector’s needs keep growing.
The Kaizen team had seen the impact companies like ISFC and Varthana had made with similar impact funds. Although they were in the business of lending on commercial terms to APS, they had also doled out money that was either waived or converted into incentives for better delivery outcomes, usually funded by foundations and other philanthropic initiatives. It was more in the nature of a reward and recognition-based lending if quality milestones were met.
That’s when Kaizen decided to raise a $150 million impact fund — as a wholesale debt provider. Although Kaizen will use intermediaries like ISFC, Varthana and Shiksha to do the actual lending, they will support the promoters of the APS in several ways.
This includes supporting them through a network of NGOs, foundations and an ecosystem of education enablers that they can reach out to for interventions at their schools. “The idea is to do the match-making for the promoters who are often not educated themselves or don’t have the access or the knowledge to reach out to organisations that can help them improve their product,” says Khambhati.
For example, if the promoter of the school has access to a database that tells him what outcome he can expect from an investment he makes, he may be more willing to make that investment. “We come in for the catalysing process,” says Khambati. Once the school has proved itself, he argues, the economics of it (better outcomes means more enrollments) ensures that the promoter wants to stay right up there as far as quality parameters go.
Through this impact fund, Kaizen is hoping to reach over 10,000 schools in India, Asia and parts of Africa. The average loan size is expected to be around $ 10,000 for an average tenure of around two years. Interest rates for such loans typically vary between 15-25 per cent per annum, based on a variety of factors. In the model designed by Kaizen, the school can get the interest, or even part of the capital, waived if it meets the improved quality parameters and delivery outcomes.
There are reasons for Kaizen’s decision to enter this space. India’s fast evolving education landscape is a vast, untouched ocean with limitless possibilities. According to data compiled by research bodies, India is expected to generate 40 per cent, or $2.8 billion, of the total global demand for loans to the education sector. As of now, dedicated school finance companies have lent less than $500 million and have touched less than 10,000 of the total 300,000 APS schools in India. In other words, collectively, the lenders have only scratched the surface.
If they are nimble, early birds like Kaizen can catch this big, fat worm.