Kaizen Private Equity, the country’s first and largest education-focussed fund established in 2010, is raising a new fund with a corpus of around $150 million.
Kaizen Private Equity, the country’s first and largest education-focussed fund established in 2010, is raising a new fund with a corpus of around $150 million. Sandeep Aneja, founder and managing director of Kaizen, tells FE’s Neha Bothra that the private equity fund with an average investment size of $6 million is looking to invest in two companies by December 2015, and is targeting a return multiple of 3.4x at an aggregate portfolio level. Excerpts:
You are investing out of a $70 million fund. How much have you invested and returned to investors so far?
We have invested about 70% across seven companies. We’ll be about 85-88% committed into nine companies by December. And we’ll stop it there because we want to retain the remainder of the money towards follow-on investments in existing companies. We have committed around $50 million, of which about $40 million has been given to companies and $10 million is retained as part of a tranche agreement, and we have returned around $7 million or $8 million to our investors. The average life of our portfolio is 2.5 years.
You invest in core, parallel and ancillary segments in the education sector. What percentage have you allocated towards investment in each segment?
This is one area where we have learned lessons through the course of investments we have made. When we first started investing we thought we will invest 40% in core, 40% in parallel and 20% in ancillary. At that time, we were not seeing much interest in ancillary but over the years we have realised that the ancillary segment has gathered a lot of space in the last two years. So at this point where we stand it looks like core will be less than 15 to 20%, parallel will be the largest at 45-50% and ancillary will be around 35%.
Which segment generates higher returns?
In core I can make 20-25% IRR, in parallel I can make 30-35% IRR, and in ancillary it can be 35% IRR to anything.
That is the general return on capital in those three segments. In core there’s a 70-80% likelihood of 23-25% returns. This is why the first investment exit we’ve had is in the core space at 23% IRR.
You have exited one investment so far. Any more exits likely this year? Could you also add some colour on what return multiples you are targeting?
We have had confirmed buy offers from international buyers for two of our portfolio companies in the parallel segment, which we have declined for the time being because we believe our companies can realise better value if we stay invested with them for two-three years more. The return we were expecting in one case was 2.2x and the other 1.7x and the companies were below two years, so we believed that by holding on to them for another two years we can drive the return multiple at an aggregate portfolio level to 3.4x on a blended basis.
What are your fundraising plans and investment strategy?
We are raising $125 million capped around $150 million. We will be investing a little over half the money in India and the rest in other economies in Asia. We’ve expanded our team and we now have employees and partners in Sri Lanka, Malaysia and Philippines and new employees in India. We believe 70% of our new fund will go towards delivery-based entities and 30% towards enabling tech companies. When we started investing from Fund I, core and parallel companies were small and not profitable. Now, they are larger and profitable so we don’t have to invest in very small companies in the delivery space. We will be looking at slightly advanced stage companies in the delivery space in Asia, including India.