Deal focus: Kaizen backs loans for learning

Growing a private school business in India can be a difficult, not least because entrepreneurs who have talent and vision in education may lack the substantial business history required when borrowing money from traditional banks. Varthana, a non-banking finance company (NBFC) that specializes in education investments, hopes to break this pattern.

Founded by former teacher Steve Hardgrave and banking veteran Brajesh Mishra in 2013, the company provides financial support to schools that would otherwise go unfunded. "Being a specialist lender enables these guys to better assess credit risk by understanding the dynamics of education, and that's really hard to do," says Sandeep Aneja, founder of education-focused GP Kaizen, which co-led Varthana's recent INR930 million ($14 million) Series B investment with Zephyr Peacock India.

Kaizen was attracted to Varthana based on the company's promise of expanding credit access for an underserved sector. Though there are many NBFCs in India that provide credit and banking services to entrepreneurs, Varthana's founders considered these companies' risk assessment methods poorly suited to the education business. Rather than basing a credit determination on a private school's assets, they thought, lenders should give priority consideration to the quality of services provided.

In addition, the GP was impressed by Varthana's plans to grow its business beyond financing and offer additional services to schools. The NBFC, which currently serves more than 1,800 schools in 50 cities, hopes to take advantage of this network to provide solutions that have worked for others in similar situations. Fee management and collections, for example, are frequent issues for inexperienced educational entrepreneurs.

"Varthana can introduce them to a player it has preselected and checked out in the market, because of its distribution to thousands of schools in India," says Aneja. "Because of our understanding of the education sector, we are able to get Varthana access to a bunch of such companies and help them build a robust portfolio as they go to schools."

As Varthana transitions into a broader educational services provider, Kaizen will also draw on its experience to help the company scale up operations - introducing technology solutions, for example, to help the company manage the growth of its network and staff.

Though Kaizen has followed Varthana since its launch in 2013, the GP held off on investing in the 2014 Series A round, feeling that the company was not yet mature enough to warrant a commitment. The investment represents a bet on education-focused financial services providers and Aneja expects a number of prospects develop in this space - for instance, in student loan providers - as participants realize the possibilities that educational institutions present.

"There are plenty of opportunities in the NBFC-education intersection where quite a bit of new stuff is going to come up," he says. "I see this market getting exciting, as schools have much more predictable credit than a lot of other entities that normally are the first preference for the NBFCs."

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• Topics
• South Asia
• Early-stage
• Consumer
• Financials
• India
• NBFCs
• Kaizen
• Zephyr Peacock Management
• Growth capital
• Education