NBFCs in school finance scout for funds

Delhi-based Indian School Finance Company and Bengaluru-based Varthana are planning to raise fund

A couple of non-banking finance companies (NBFCs), specialised in lending to private schools, are planning to raise fresh equity capital. These include venture capital (VC)-backed companies such as Delhi-based Indian School Finance Company and Bengaluru-based Varthana. 
 
Both of these companies are planning to raise $50-60 million each, said two people familiar with the development. While Kotak Mahindra is helping Varthana, Deloitte is running the book for Indian School Finance Company. The founders of these companies could not be reached for comments.
 
‘‘It’s a huge market. There are 200,000 private schools in India. Banks don’t lend them, but many of these schools need funds to upgrade their infrastructure,’’ says  head of a private equity firm.
 
‘‘They have the ability to grow the loan book (they have lent Rs 250-300 crore each), enjoy good yields (14-15 per cent), while the loans are secured by land and property. It’s a good time to come in now,’’ he added.
 
There are governance risks, with many school founders coming from real estate sector, but investors take comfort in cash flows from fees, which help schools generate 20-25 return on equity, said an investor. Schools are recession-proof, says an investment banker.
 
He says there are many affordable schools, who charge only Rs 500-700 a month as fees. These NBFCs are targeting them. The two NBFCs have been backed by the impact investors. Varthana is backed LGT Venture Philanthropy, Omidyar Network, Elevar Equity, Kaizen Private Equity and Zephyr Peacock India, the last two pumping in $14 million into the company last year.
 
Similarly, Indian School Finance Company raised $6 million from Gray Matters Capital in October 2016, after being backed by impact investors Gray Ghost Ventures and Caspian Advisors.
 
“India has a huge base of affordable private schools, which presents a huge opportunity to scale. With the absence of competition, growth is possible both by going deep and going wide,” Robert Pattillo, founder of Gray Matters Capital had said while funding Indian School Finance Company.
 
‘‘These NBFCs lend to established schools and give incremental loans of Rs 5-10 lakh to build a lab or buy some computers,’’ says an entrepreneur who has started a non-profit school. The loans typically goes to the person who owns the land.  While schools are non-profit and are managed by trusts, many outsource various services to an advisory company, which may own the land and charges the school for various services.

New investment avenue

• Delhi-based Indian School Finance Company and Bengaluru-based Varthana, among others, are planning to raise fund
• These companies are planning to raise $50 -60 million each
• While Kotak Mahindra is helping Varthana, Deloitte is running the book for Indian School Finance Company
• There are 200,000 private schools in India. Many of these schools need funds to upgrade their infrastructure
• Indian School Finance Company raised $6 million from Gray Matters Capital in October 2016