Driving Grades, Driving Growth

World of Work October 07, 2015

How Private Capital in Education is Increasing Access, Inspiring Innovation, and Improving Outcomes

This article is the executive summary of the 2015 WISE Research Report “Driving Grades, Driving Growth“.

Find out more about the 2015 WISE Research series.

The global education community comes together at the WISE Summit united by a shared belief that education drives positive change for individuals and communities. This belief is supported by numerous studies about the benefits of education: it is a vital driver of personal and national prosperity and one of the most critical levers in sustaining and propelling a nation’s economic growth. At the heart of our dialogue at WISE is an urgent question: How can we ensure that education’s benefits are felt not just in developed economies but in all countries?

Governments, of course, play an essential role in increasing access, but in many nations, increasing demand for high-quality education has led to overburdened and overcrowded public sector education systems. Population growth over the past hundred years, coupled with the growth in economic wealth of nations and the push to achieve the UN Millennium Development Goals, has contributed to an increase in enrollments. Moreover, with the growth of the middle class across emerging markets comes an increase in aspirations and in demand for high-quality education.

Against this backdrop private capital is increasingly being deployed to finance education, particularly in emerging markets. Private sector provision has become a successful supplement to the public sector, providing seats in oversubscribed segments, and operators have experienced rapid growth. Traditional investors have taken note of this potential, and mergers and acquisitions activity in the sector have increased by over 600 percent since 2000.

In a forthcoming study to be launched at WISE 2015, Parthenon-EY explores the ways that private capital has been a game changer within the world of education:

  • Expansion: Private financing can enable educational institutions and services to scale, supporting access to education for more individuals as it seeks to maximize profits through broadened service provision.
  • Innovation: Given its profit motive, private capital also has strong incentives to compete and innovate. Therefore new financing of education supports research and development that drives more effective provision.
  • Outcomes: Private investors also introduce a strong focus on outcomes into the education sector. Tracking and pursuing outcomes have provided a foundation for the efficient deployment of capital.

Important risks and challenges are associated with deploying private capital and investment in private education enterprises, particularly in terms of ensuring education quality and equity. Given these issues, government and other stakeholders can play a key role in mitigating these challenges through effective regulation. Moreover, as educational institutions and services only survive if they provide value for money, it is in their best interests to focus on quality.

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In the report, Parthenon-EY profiles a range of education initiative case studies showcasing ways that private capital is shaping the education sector, including the 2014 WISE Awards winning project Educate Girls, which has recently launched a Development Impact Bond (also known as a payment by results bond) in partnership with a mainstream investor. We also profile the 2015 WISE Awards Winner Bridge International Academies, which is the world’s largest education company serving families earning less than $2 (USD) a day, now reaching 100,000 children across Kenya. The case studies illustrate important lessons for governments, operators and investors seeking to leverage private capital responsibly within the education sector, some of which are highlighted below.

Governments can support the effective deployment of private capital in education by designing transparent, consistent and supportive regulations, often developed in partnership with industry. Governments can also leverage public-private partnerships to drive education access, particularly in segments that are oversubscribed or underserved, such as special needs education.

Education operators can effectively leverage private capital by designing robust business models characterized by deep consumer insight and contextualization, given education’s cultural ties and local variability, alongside scalability and adaptability. Operators can attract investors by collecting robust data on outcomes and by emphasizing their social impact, which can be a powerful pull to make investments and to retain education operators in a portfolio.

Finally, investors can succeed in education investments by leading with profitability. All investors, including impact-focused investors, should lead with profitability, seeking investments that can provide financial returns alongside healthy social impact. Investors also must realize education is a long-term business. Education businesses require investment over a longer time horizon than other sectors, and education success in the long-term requires an investment in quality. Investors must also look for category definers that challenge the status quo.

It is an exciting time to work in education. For Parthenon-EY, this research has underscored some dynamic trends we believe will profoundly shape the sector and the world in the near term: marquee financial returns and public listings, disruption driven by technology, and novel investment vehicles and intermediary organizations. We look forward to debating these ideas with you this year at WISE and sharing the findings from this important work.

The views expressed by Ashwin and Mary are their own and do not necessarily represent those of Parthenon-EY or the global EY organization.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

Parthenon joined Ernst & Young LLP on August 29, 2014. Parthenon-EY is a strategy consultancy, committed to bringing unconventional yet pragmatic thinking together with our clients’ smarts to deliver actionable strategies for real impact in today’s complex business landscape. Innovation has become a necessary ingredient for sustained success.

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

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