On VENTURES AFRICA, a Kenyan financier talks about opportunity and investment in the business of education.

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.

Image courtesy of africa / FreeDigitalPhotos.net

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.

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 Daily newspaper 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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