Emerging markets are a growing opportunity for global investors in education, and the quantum of transactions in emerging markets education grew nearly 70 times between 2001 and 2015.
Sub-Saharan Africa (SSA) is no exception to this trend, with an estimated private investment requirement in education over the next five years of $16 billion to $18 billion. In what follows, I will explore the opportunity in African education for both impact- and profit-oriented investors. In doing so, I will draw extensively on our learning from The Business of Education in Africa report, a major piece commissioned by Caerus Capital and supported by the Education Centre of Excellence at Parthenon-EY.
Education investment in emerging markets: attributes and challenges
The emerging markets education sector is characterized by a unique set of conditions that present opportunities and challenges to investors. Five key attributes of education businesses in emerging markets make them attractive for investors:
1) Demand for education is typically greater than supply
2) Education fees usually grow faster than inflation
3) Education offers long-term revenue visibility, as completion of courses takes multiple years
4) Fees are usually paid in advance, providing operators with negative working capital
5) High barriers to entry prevent the market from overcrowding
Challenges specific to the education sector are compounded in emerging markets such as SSA, given that the wider business environment is more challenging. These challenges can include regulatory complexity and uncertainty, long gestation periods for new entrants, fragmented markets and skills shortages of education-sector professionals at all levels.
SSA is brimming with opportunities for investors of varying risk appetites, return expectations, investment capabilities and social-impact objectives. These investors include early-stage commercial investors, commercial and strategic investors, impact investors and donors and foundations.
The investment opportunity in education in sub-Saharan Africa
Investment opportunities are present across various segments of education, however core delivery represents the largest opportunity with about 85% of the total investment required and the largest demonstrated asset scale. As indicated above, the total opportunity in SSA could be as high as $18 billion in the next five years, but it is worth noting that just $1.5 billion to $2 billion of this is in the formal, organized segment and accessible to traditional investors.
The opportunities across core delivery and ancillary services are described below:
Pre-primary ($0.8 billion to $1.2 billion) in public schools is both insufficient and of poor quality in most of the region, and key opportunities lie in the roll-up of existing mom-and-pop centers, as well as greenfield expansion of private provision by commercial investors and expansion of innovation-oriented pilots by donors and impact investors.
Low-cost K–12 ($8.0 billion to $8.2 billion) has both social and economic potential for investors. Two key opportunities include the potential for impact investors and donors or foundations to develop new models and the opportunity for donors to address access inequality. In South Africa, LEAP Science and Maths Schools provide free education to 1,500 qualifying students across six schools, while Omega Schools enroll approximately 20,000 students across 38 schools in Ghana and Liberia with a “pay-as-you-learn” model in order to meet the cash-flow needs of low-income families.
The mid-priced/premium K–12 ($2 billion to $2.2 billion) segment is large and growing, driven by the poor quality of public schools and growing affordability for middle-class Africans. This is a strong segment for commercial investors, with an addressable market of approximately 22 million students that is growing at a rate around 4%.
Nearly 30% of African higher-education enrollments are in the private sector. Contact higher education’s ($2 billion to $2.2 billion) high growth, profit margins (average profitability of higher-education assets in SSA is 25%-30%) and revenue potential make it arguably the most attractive segment for commercial and strategic investors. Operators are leveraging this opportunity; for example, the African Leadership University charges $4,000 per annum and aims to graduate three million leaders across 25 campuses by 2060. Distance higher education ($0.5 billion to $0.7 billion), presents opportunities for strategic and commercial investors to expand access. For example, South Africa’s MANCOSA is the largest distance-education provider and enrolls over 10,000 students, with a focus on the premium segment.
The technical and vocational education and training ($0.5 billion to $0.7 billion) sector can play a key role in addressing high youth unemployment and the skills gap on the continent. However, as a nascent sector, it is more suitable for impact investors. Innovative models have emerged that target education for employment. For example, South Africa’s Harambee Youth Employment Accelerator has placed over 40,000 unemployed youth in jobs through its matching capabilities and work-readiness programs.
Ancillary services ($2 billion to $3 billion) encompass teacher training, supplementary education, education technology and publishing. The most compelling opportunities for early-stage commercial investors lie in edtech, which includes initiatives such as Eneza Education, a subscription-based SMS platform that offers learning resources based on the national curriculum, reaching over one million students across Kenya, Ghana and Tanzania. Impact investors and donors can play a significant role in transforming the sector by supporting public-private partnerships in teacher training, promoting innovation and experimenting with new-student and institutional finance models.
Key trends
Key investment trends are emerging in SSA’s education sector. First, proven global education providers are entering the African education market. Examples include Apollo Education Group (Milpark Education) and GEMS Education. Additionally, global financial investors are showing an active interest in SSA, such as Actis (Honoris United Universities), Development Partners International (Université Privée de Marrakech) and Emerging Capital Partners (Maarifa Education). Lastly, local education companies are expanding in SSA and globally. Some examples include ADvTECH Group (University of Africa), Educor (London College of International Business Studies) and MANCOSA (Southern African Development Community countries).
The investment opportunities presented by SSA are significant, diverse and well-suited for a variety of investors. Due to the high degree of fragmentation and lack of large chains in nearly all segments of education, there are ample opportunities for investors to open new businesses, expand existing provisions, consolidate fragmented supply and explore innovation in riskier market segments.
This article is the fourth in a series on the current role and potential for private education in sub-Saharan Africa. The articles draw extensively on the authors’ work on The Business of Education in Africa, a report commissioned by Caerus Capital and supported by Parthenon-EY’s Education Centre of Excellence and Oxford Analytica. Sudeep Laad is a Vice President in the Education Centre of Excellence at Parthenon-EY, Ernst & Young LLP. Priyanka Thapar, Emerging Markets Education Associate at Parthenon-EY, Ernst & Young LLP, contributed to this article. The views set out in this publication are not necessarily the views of the global EY organization or its member firms.