Private Equity in Education Sector
Private Equity in Education Sector
Abstract
Private equity in the education industry has grown in tandem with the development of impact investment. “Everyone can get behind education as an impact investment,” says Jennifer Wong, CFA of Glenmede. “It's easy to point to and say that investing will make a real difference.” Wong shared her insights as an impact research analyst in private investments at Glenmede, including where private equity investors in education have been in the past and where they might go in the future, as well as the challenge of balancing impact and returns.
Introduction
Because of these limitations, many private equity impact investments in the education sector concentrate on technology and vocational education. Education technology is often marketed to schools and businesses, where it helps to reduce costs and expand access to education. Vocational education focuses on skill development. Education finance innovation, such as student loan platforms and refinancing firms, is another sector that provides both the impact and the return needed by private equity investors.
“Companies aiming to reduce student loan rates have attracted private equity funding in recent years, indicating that some investors trust in their potential to produce return,” Wong adds. “You might also argue that, in terms of effect, they have extended reduced education prices to more individuals. However, opponents would point out that, although lower-cost education is now accessible, these goods do not target those in most need.”
Wong predicts that private equity companies would become increasingly interested in impact investing in the education sector in the future, as well as a convergence between pure impact investors and more conventional financial actors.
“A lot of money is coming into impact investing,” she adds. “You have to think that in order for all of this to work, a modest impact investing firm with maybe $50 million or $100 million in its initial fund would be able to sell some of its assets in the future to either bigger impact funds or larger conventional private equity funds.”
Precedents and Difficulties
“Because education is a sector in which private equity firms have traditionally engaged, it is simpler for investors to understand,” Wong adds. “It is not an undiscovered industry where everything is brand fresh from the ground up.”
Private equity companies have previously concentrated on corporate education, training systems, vocational training programmers, and for-profit education models ranging from prekindergarten through high school. Private equity investors are also becoming more interested in educational technologies.
It is easy to see how education can be utilized to reduce performance disparities, improve communities, and pull individuals out of poverty. In many instances, the effect of private equity in the education industry is palpable and readily quantifiable. Nonetheless, the quantity of money pouring into education investments remains much smaller than that spent in other high-impact industries. According to a 2017 study from the Global Impact Investing Network, education accounts for just 3% of impact investing assets, whereas housing accounts for 22% and energy accounts for 16%.
This discrepancy illustrates some of the challenges that private equity impact investments in education face. One of the most significant of these issues is that, although many education programmers aim to reduce the cost of schooling, doing so may limit the upside in terms of the investment itself.
“That is why it has been difficult for investors to really disrupt the current quo via private investments,” Wong explains. “Education charities are prepared to accept a concessionary return in order to have the greatest effect, therefore they are OK with giving stuff out for free or allowing companies to try out ideas for free. However, in my opinion, this distorts the entire market and makes it more difficult for companies to develop sustainable strategies. As an investor, I am solely interested in goods that provide market rates of return.”
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