Many market entrants find investing into education for the first time a challenging market. What top five factors would you recommend new investors consider before investing into education in Africa?
Education can be a challenging market for first-time investors in the space, particularly in a geography as diverse and varied as Africa.
Common challenges for investors will include:
- Fragmented Markets
- Small Asset Sizes
- Time-Consuming Process
- Regulation/Policy Changes
- Sparse Information/Unreliable Data
Investors should be prepared to take the time to really understand markets to ensure they are investing in an appropriate sector and scalable asset. Markets are very local in their behavior – for example, a school’s success will be determined by its relevant catchment area. It’s crucial that investors engage in on-the-ground research rather than making decisions based on broad trends.
How does doing business in Africa differ to the other markets that you have worked in?
We often find similarities in how education works in countries with growing populations and rising GDPs. Similar to many of these countries like Brazil, India, and China, we see the same demand for private education growing across the continent with public education enrolments slowing. Within the development of private education, we see Africa about 15 years behind Asia and 2030 years behind Latin America. For instance, the tertiary gross enrolment ratio (i.e the percentage of the relevant population enrolled in higher education) in many African countries is <10%, similar to that of India and China at the turn of the century. However, unlike Asia, the regulations in Africa today are much more conducive to private education than Asia’s were. The markets are extremely fragmented throughout Africa with small asset sizes, a common trait of the education sector globally. Indeed, private education is a $2 trillion cottage industry. Only 21 companies have revenue > $1B; of which only 2 are focused on emerging markets. Finding scale opportunities is difficulty -investors must carefully consider the potential for an asset to be scaled and how they can contribute. We’d recommend investors ensure they have the right team and expertise in education and prioritize value creation post-acquisition.
Which geographies hold the greatest potential for investment?
Every country in Africa differs in potential but they all hold specific opportunities for investment. We’ve seen successful investments around the country from Morocco and Tunisia in North Africa and throughout sub-Saharan Africa including more developed markets like South Africa and Nigeria to places with more nascent markets like Zambia and Rwanda.
Early years vs K-12 vs Higher vs Vocational – Where is the greatest need and where’s the best return?
There is a great deal of demand in both K-12 and higher education. In emerging markets, there is always more need for these sectors as they both present specific value to parents and students. The lack of quality seats available deepened by the poor quality provision of the public sector make both K-12 and higher education the most crucial for growth and investment. These sectors also both present the greatest potential for high returns with strong investment characteristics including long-term revenue visibility, high barriers to entry, demand greater than supply, prices rising higher than inflation, and negative working capital. In addition, vocational training is only successful when there are specific barriers to enter the job market (such as the certification requirements seen in vocational job sectors in developed markets). With no barriers like these, most people try to learn on the job and there have been no vocational companies of scale in emerging markets. In terms of early years, catchment areas are hyper-local and businesses are much harder to scale than those in K-12 and Higher Education.
Bricks and mortar vs educational technologies? Which sector will attract the greatest investment in the future?
As mentioned, there is a great deal of demand for quality K-12 and higher education. So much demand that there is not enough capacity in certain markets to meet the needs of the market. Therefore, we believe we will continue to see bricks and mortar bringing the greatest investment for the foreseeable future. While education technology can supplement the system, there is no replacement for getting students into seats at schools that bring them specific value. In other emerging markets, like Latin America, education technology has been successful when it can complement learning in the classroom. Similarly, as the sector grows in Africa, there may be opportunities for more technologies to aid teachers and students in classroom learning but our experience in Latin America and Asia tell us that brick and mortar will continue to be the largest opportunity.
Parthenon is a leading advisor to the education sector globally, guiding the largest organizations across sectors of education including K-12, higher education, transnational education, vocational training, ELT and education technology. Parthenon’s Education Practice completes more than 150 projects annually across more than 80 countries.