Education emerges as a hot private equity play as Fanisi buys Hillcrest
The announcement that Fanisi Venture Capital Fund is to buy Hillcrest Schools is likely to bring into focus the education sector as a viable investment destination for East Africa’s thriving private equity sector.
It also marks a happy ending for Barclays Bank and Kenneth Matiba’s family, who have been locked in dispute since 2005, when the former put the schools under receivership.
The group of investors behind the deal used an innovative, “friendly” strategy of advancing the Matibas the cash to pay off Barclays to save their family fortune, and then entered into a deal to buy some of these assets — with the Hillcrest brand as the crown jewel.
A typical strategy used by private equity in mature markets is to act as a vulture fund and bid for distressed assets for a fraction of their true market price.
While most private equity players have in the past few year focused on the fast growing information technology sector and large-scale infrastructure, Fanisi’s investment is a big bet on a sector that has so far been widely ignored.
“Education is a hot area for investment,” said Ayisi Makatiani, managing partner and CEO of Fanisi Capital, pointing at rising school enrollment and demand for quality education among the emerging middle class in the region. As demand rises, more of these elite schools are looking for cash to expand facilities, accommodate more students and attract expatriate teachers.
Hence, private equity players, backed by deep-pocketed financers or development partners who are keen on encouraging entrepreneurship in the education sector, are sensing an opportunity and putting money in elite schools across the region.
The International Finance Corporation, the private-sector lending arm of the World Bank, is said to be “seriously looking” to buy a stake in the Braeburn schools in Kenya and Tanzania, a deal that should be concluded in the coming weeks, said Neha Sud, a communications officer with IFC.
Tunisia-based AfricInvest has bought into Brookhouse International Schools, one of the only two members in East Africa of the Round Square network of schools. Starehe is the other; there are about 80 across the globe, which have mutual exchange programmes.
Demographic shifts are making education a hot investment in Africa, according to Mr Makatiani. He points to the 422 million Africans estimated to be under the age of 15, which is roughly 40 per cent of the continent’s population.
Africa’s population is also growing fast; an estimated 33 million babies are expected to be born in 2011. The continent’s strong economic growth has produced an emerging middle class as multinationals, the private sector and governments have invested and created jobs.
“Kenya’s middle class is growing really fast,” said Mr Makatiani, adding “And many of them are taking their children as their most important asset.”
Many parents are now paying a premium to buy their children education based on the British curriculum as well as vocational training and other skills such as art, theatre and music offered in these schools.
For example, fees at Brookhouse International School come to about $6,770 per term for a 17-year-old inclusive of boarding facilities. Comparably, a student in a Kenyan government national school will pay about $280 per term.
The IFC estimates private schooling at between 10 and 40 per cent of primary and secondary schooling in Africa. The penetration is highest in Kenya, Nigeria and Ghana where it is estimated at 40 per cent.
“People are taking the initiative and not waiting for the government to set up these schools,” said Mr Makatiani. “We enable the private sector to fill in where the government cannot.”
But what kind of returns are the private equity and venture capital funds looking for from their investment?
Mr Makatiani says the percentage return should ideally be in the 12-19 per cent range, which is upon the low side for private equity ventures, adding that this is justified by the fact that investment in education has a high developmental impact project.
Fanisi’s major shareholders comprise a number of development finance institutions, including the Norwegian Fund for Developing Countries (Norfund), the Finnish Fund for Industrial Co-operation (Finnfund), Proparco, the private sector arm of Agence Française de Développement (AFD) and the IFC.
The venture capital fund has invested heavily in the ICT and telecommunications sector in East Africa.
With their investment in Hillcrest Schools — through Hillcrest Investments Ltd, a company in which Fanisi is the majority shareholder — Mr Makatiani said they are looking to build more dormitories, strengthen the A level centre, build a music school and invest in IT systems.
Anthony Wahome, an investor in the ICT sector and also in education — he runs Rose of Sharon Academy — is the other shareholder in Hillcrest Investments Ltd, with an estimated stake of about 30 per cent.
Fanisi, Mr Makatiani said, is looking to grow their equity investment so that they make a profitable exit instead of looking for yearly returns.
“It will be a business of improving the house and not seeking rental income,” Mr Makatiani said, adding that their plan is to develop the school into “Africa’s Eton.”
The school has over 600 students of 40 different nationalities, ranging in age from two to 18.
In the offer for sale notice by former receiver managers, Kieran Day and Kereto Marima of the Business Advisory Group Ltd, Hillcrest International Schools’ business and assets were described as profitable.