A Kenyan financier talks about opportunity and investment in the business of education

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Exploring The Business Of Education: Ayisi Makatiani

The first thing a visitor to the Fanisi Capital boardroom notices when he walks in is a big black television and, below the television, a picture. It is an interesting one to look at: the people in it – students and teachers, presumably – are of every race, skin and hair colour, all smiling. The lawn in the foreground is lush and well manicured. Palm trees rise above the smiling faces, flanking seven thatched roof peaks. It could be a picture of a “Young United Nations” conference on a tropical island. The only thing that shows it is not the UN is a school crest. Hillcrest Investments Limited (HIL) currently owns the school in the photo, as well as its sister schools on the same campus.

HIL was established in 2011. Its principal shareholders are Fanisi, a $50-million venture capital fund represented by Ayisi Makatiani; and Anthony Wahome, an investor whose principal ventures include include the Linksoft Group of companies and the Rose of Sharon Academy. Hillcrest is a source of great pride for Makatiani. His office nametag and keys hang on a Hillcrest-branded lanyard. So how did Makatiani, who built Africa Online, one of Africa’s first Internet service providers, end up owning a school? “It was an opportunistic move for Fanisi,” he says. “The school was put up for sale and we bought it at the cost of land.”

The Value of a School

Kenneth Matiba, an education official who later became one of Kenya’s most vocal opposition politicians, set up Hillcrest School as a preparatory academy in 1966. In December 1973, the idea to establish a secondary school led to the purchase of 10 hectares of land in Karen, 15 kilometres from Nairobi. The school accepted its first intake of secondary students in the January term of 1975. In 1998, the preparatory school relocated to Karen. Today the 1973 campus is home to all of the Hillcrest schools: Hillcrest Early Years, Hillcrest Preparatory, Hillcrest Secondary and Hillcrest Senior School, collectively known as Hillcrest International Schools. The school accommodates 700 students from 30 countries, catering to families from the international, professional and local business communities. It is a co-educational fee-paying school and is very expensive by local standards.

Matiba, once a minister in Jomo Kenyatta’s government, had, by the late 1980s, fallen out of favour with Kenya’s second president, Daniel arap Moi. Following some time spent in prison at Moi’s demand and a serious illness in the 1990s, Matiba’s business interests took a turn for the worse. In September 2006, Barclays Bank of Kenya, from whom Matiba had taken a loan of $686,525 (according to The Star of Kenya), placed the school in receivership. In 2011, the HIL consortium bought the school from the Matiba family for a still as yet undisclosed amount. The school originally sat on 55 acres (22.2 hectares) of land in upscale Karen.

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The new owners immediately placed 17.9 acres (7.2 hectares) up for sale. “We did not want to keep worrying about when someone would try to take over the school and establish some apartments or estate,” says Makatiani. “The sale of the land also helped deleverage the deal and once done, we could focus on running the school as a school. At this moment, the school is now worth three or four times the value of the land it sits on. When we bought it, it was worth less than the value of the land.”

While Makatiani would not disclose how much the land sold for, a real estate expert speaking to the Business Dailynewspaper in February 2013, when the land was put up for sale, estimated that the whole Hillcrest campus would cost between $4.1 million and $4.8 million. Coupled with Makatiani’s statement that the school was bought at the cost of land, this figure places the purchase deal between $12.8 million and $14.8 million.

A Smart Investment

Like every other sector of the Kenyan economy, education has seen increased investment over the last 10 years, with more venture capitalists and private equity firms buying in. In 2012, Bridge International Academies closed East Africa’s largest venture capital deal, raising $30 million from firms that included New Enterprise Associates, one of the world’s largest venture capital firms; and Omidyar Network, the fund of a founder of the website eBay.

Bridge International Academies is now Kenya’s largest chain of businesses with over 200 schools and over 50,000 pupils. They focus on low cost and high volume, using a franchise-style model in which each school manager gets a share of the profits the unit generates. The schools’ investment in technology is amortised over several years and large numbers of students. Jay Kimmelman, Bridge’s CEO, expects Bridge Academies to break even at 500,000 pupils enrolled. While Kimmelman’s Bridge Academies focuses on providing low-cost primary school education at an estimated $60 per student per annum, Makatiani’s Hillcrest targets a completely different set of students. Parents of a final year student at the school are expected to pay $7,652 per term, or $22,956 for the year if the child is to board. In Kenya, “the education space can be divided into two or three sections,” says Makatiani. “One is international education and the other local education. In international education, which is our focus, you are competing with schools all over the world, especially at the high-school level.” The children who attend schools like Hillcrest “could be going to schools in the UK, South Africa or in the USA. You have to provide them with [a comparable] product. When we interview children, the other schools they are considering are usually outside the country.” There are several schools in the international schools category in Kenya that compete with Hillcrest. Braeside, Pembroke, Peponi School, St Andrews Turi and Brookside are all in the $20,000 to $30,000 per child per annum fee bracket.

The Buyer

Makatiani is no stranger to high quality education himself. He was educated at Alliance High School for his A-levels, and prior to that attended Maseno School – both considered among Kenya’s leading schools. He received a bachelor’s degree in Electrical and Electronics Engineering from Massachusetts Institute of Technology (MIT) – arguably the best technology university in the world – and completed his thesis at the MIT Sloan School of Management. While studying in America in the mid-1990s, Makatiani started Africa Online with two Kenyan friends. It began as a service distributing news from Africa by email and entailed hooking up two computers – one in Boston, the other in Kenya. Makatiani and his partners soon realised there was demand for the service and went on to create a web-based offering, riding the Internet wave that was starting to sweep the world. In 1995, an American technology firm now known as Prodigy bought Africa Online. It provided Internet access along with content and expanded from Kenya into other African countries, where it was often the first firm to offer such a service. For two years following the buyout, Makatiani tried to raise $44 million to launch Gallium, a private equity fund for Africa. He wanted to use his experience with Africa Online to help companies in the region but got only half the money he wanted and decided to drop the idea. While looking for investors, however, he had approached the International Finance Corporation (IFC). They thought he was just the man to run African Management Services Company (AMSCO). Makatiani felt it was a chance to do what he had hoped to do with Gallium.

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Between 2004 and 2008, he was at the helm of AMSCO, based in Johannesburg. It was the brainchild of the IFC – the World Bank’s private sector arm – the UN Development Programme, and the African Development Bank. Its mission is to help small African firms become competitive. Upon leaving AMSCO, he took up his current post at Fanisi.

A Growing Sector

Since 1985, public education in Kenya has been based on an 8-4-4 system, with eight years of primary education followed by four years of secondary school and four years of college or university. Private schools offer either the 8-4-4 system or foreign education systems like the Montessori system for kindergarten, the International General Certificate of Secondary Education, the International Baccalaureate, the French International Curriculum, or the Steiner-Waldorf curriculums. Schools are either government owned or private, and private ownership of schools is either for profit or non-profit. For-profit schools are often owned by individuals or corporations, while not-for-profit school are owned by charitable trusts, churches and missionary organisations, and social development organisations (such as AgaKhan Academies).

In the 1980s, as a result of poor economic policies, declining macro-economic performance and the highest population growth rate in the world, the quality of education provided by government schools in Kenya begun to decline rapidly.

As a result, the number of fee-based private schools, most of which were “academies”, begun to mushroom all over the country, established by private entrepreneurs and promising a higher level of education than the public schools.

The pattern repeated itself in 2003, when the Kenyan government re-introduced universal free primary education, with funding from development partners such as the World Bank and the UK’s Department for International Development (DFID). The change saw primary school enrolment rise but without commensurate investment in quality of teaching and in infrastructure. In addition, the government increased the minimum number of students that high schools were required to take in but did not raise funding. The combination of low funding and more students once again increased the pressure on resources at the public schools, sparking demand for private schools that could guarantee a quality education. The number of private primary and secondary schools in

Kenya grew seven times between 1990 and 2000. Individuals who invested their own money set up the bulk of the new private schools. As at 2007, individually owned schools made up 63 percent of the private schools, while church-owned schools constituted 17.2 percent. Partnerships (9.7 percent), private domestic company (4 percent), and non-governmental organisations (2.3 percent) owned the remaining portions. Kenyan students account for 98 percent of total enrolment in private schools, while the remaining 2 percent come from other countries. Out of the total number of foreign students enrolled between 2001 and 2003, 36 percent were from Eastern Africa, 26 percent from Asia, 25 percent from other African countries, 11 percent from Europe and 1 percent from America. The number of post-high-school institutions has also grown. Up until 2000, there were five public universities and five private universities in Kenya. As of 2013, there are 22 public universities, with nine constituent colleges and 17 private universities with five constituent colleges.

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Another 12 institutions await university charter. An estimated 90 percent of private universities in Kenya are affiliated with churches and other religious organisations. Almost all are not-for-profit as per their charters. Recently, both the government and private players invested significantly in education-related technology. The government is currently seeking suppliers for its “one laptop per child” programme – it intends to issue a laptop to every pupil in a public school in Kenya. The award-winning Kenyan startups Kytabu and eLimu both seek to use technology to deliver education to primary and high school children, over tablets and mobile phones respectively. Eneza Education, an education technology firm that delivers revision notes by SMS, crossed the 100,000 users mark in October 2013.

The Future of Education

Demand for schools in Kenya is expected to keep increasing at all levels,primary, secondary and tertiary. The country’s economy is growing, as is its population. More than 40 percent of Kenyansare below the age of 14, providing a very large market for the business of education.The growth trends in education are expected to continue. “A Guide for Investorsin Private Education in Emerging Markets,” published by the International Finance Corporation in July 2010, notes that educational enterprises can be very profitable, with earnings before interest, tax, depreciation and amortisation (EBITDA) of between 20 percent and 30 percent. The average EBITDA margin for schools that the IFC supports or has invested in is 41 percent, with net profits after interest and depreciation ranging from 10 to 20 percent. Fanisi Capital will be making additional investments in the educational sector.

“While we were a generalist fund at the beginning and invested in Hillcrest as an opportunity that presented itself, education has become one of our key focus areas,” notes Makatiani. While the fund has not set out a specific amount, Makatiani says that they may invest between $5 million and $10 million over the next few years. “At Fanisi, we will be looking to go into the aspirational middle-class segment across East Africa, where the annual school fees are around $4,000. We will also be looking to go into the tertiary education space, targeting post university students who are not necessarily well equipped to go into any career. It could be accounting, aviation, professional education, engineering,” he says.


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