Purpose and Capital to Bring Quality to Education

Special Focus : The Future of Education: What Role for Private Capital?
World of Work October 06, 2015

“Over the past generation many of the most talented people on earth have tried to transform capitalism itself, to use the market to solve social problems. These are people with opposable minds: part profit-oriented and part purpose-oriented.”

In describing these “opposable minds,” New York Times columnist David Brooks was commenting on how investors and the social entrepreneurs they are funding have “created organizations that look a little like a business, a little like a social-service provider, and a little like a charity—or some mixture of the three.”

The United States, with its deep capital markets, is ground zero for this type of socially-oriented investment—but many Latin Americans are now getting involved. The region faces a range of challenges in education and other critical social sectors that could be addressed by social impact funds. These opportunities are bringing more flows of capital to the region. 

This flow is based on the idea that delivering better education is no longer the monopoly of the state, or charity organizations. The for-profit sector can do it just as well or better, and, increasingly, on a massive scale. “Scalability is very difficult in the social sectors, like health and education, if you based your business model on philanthropy alone,” says Felipe Pages, president of Innovadores de America, an initiative that support impact-oriented entrepreneurs. “Equity investment is sometimes a better way to create sustainable initiatives that also generate exponential growth.” 

Latin America’s emerging middle classes are now demanding better education. That, combined with fragmented school systems, has created the perfect conditions for private equity to get involved.  Yet progress remains slow, for several reasons. A major one has to do with the length of investment needed to really provide quality education. The sector requires longer term commitments than many equity funds are used to.

Another major obstacle is the lack of human capital. Even as financial resources find their way into the sector, there is a persistent lack of entrepreneurs and other on-the-ground practitioners. “The majority of highly educated professionals in Latin America don’t choose to work in education,” says Antonio Caparros of the Inicia Fund, a social impact fund seeking to bridge this gap by investing and scaling-up innovative education models.

So far, the private equity that is active in Latin America has largely focused on expanding access, particularly in the realm of language acquisition. Millions in investments have gone to startups and language programs like Open English, Descomplica, Voxy, Rosetta Stone, and Duolingo. Higher education, too, has seen investment from major firms like Laureate, Apollo, and DeVry, which have acquired universities and technical schools. 

However, the sector perhaps most in need – elementary and high school – has seen very little of this activity. Investors like Peru’s Carlos Rodriguez Pastor are trying to change that, with networks of low-cost private schools.

In the United States, big education companies like Pearson, Kaplan, and Cengage have realized the importance of acquiring fledgling startups. They know they can’t move as fast as these new companies, but they can learn from their innovation and scale their efforts. This kind of culture of acquisition is yet to catch on in Latin America. The largest players there, like Santillana, Grupo SM, and Carvajal have launched their own high-tech initiatives, but there is little movement to bring on outside expertise. 

Complicating the picture is the recent wave of backlash against private investors. In the United States, the sudden closure of Corinthian Colleges’ twenty-eight campuses after the private school company was accused of fraud has highlighted the need for better regulation and oversight. And in Chile and elsewhere, private education has drawn the ire of student protest movements, leading investors to be wary of the political sensitivities of the sector.

Clearly the government has a major role to play in evaluating the quality of all educational institutions—public or private—and closing those that don’t make the grade. But the arguably fair opposition by some politicians and members of the media that have latched on to these cases of malfeasance does little to solve the underlying issue: that demand for education is quickly growing, and meeting that demand without the help of the private sector will prove very difficult.

That is why, in Latin America as much as in the United States, we have to go beyond the stale public-private debate. The problem is a pragmatic one: how to deliver high quality education to more than 100 million students in classrooms across the region. That is a tall order for often overburdened public education systems to handle on their own.

Reaching the next level of development means greater competitiveness, based on enhanced human capital and innovation. To get there means significant investments in research, skills, and education – and government can’t do it on its own. The nascent flow of private capital to Latin American education should be welcomed—and encouraged.