Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
annual cost of providing that education is about $30–$65 per student per annum
(based on Gyan Shala’s ultra-low-cost model and the cost structures of alternative
affordable private schools analyzed by Monitor 87 ). These figures imply operating
profit margins of about 35%. Making a more conservative assumption (particularly
given we are comparing fees charged by schools that are different from the ones for
whom we consider the operating cost), we will assume profit margins between 10%
and 20%, which gives us an estimate of the potential profit opportunity of $2.6–
$11bn. In our analysis, year 10 revenues provide the estimate for required funding of
$5–$10bn.
Challenges for affordable private schools: Late fee payment and high competition
One of the challenges with providing services for BoP populations is managing the
volatility of income cashflows that the customers experience. Within the education
sector, this has been recorded by Gray Matters Capital’s research to the degree that
71% of surveyed schools had 25–50% of fees pending. The research also cites such
high competition in Hyderabad City that 93% of schools give concessions of some
kind – such as free uniforms or textbooks – to attract students. Schools may be able
to cope with the competitive landscape by operating in less penetrated cities and
delivering high quality education (as quality is one of the main reasons parents
choose to pay). The late fee payment question may be more difficult to manage but
some schools mitigate this risk by retaining one month of recurring expenses as a
reserve or by collecting portions of the fees throughout the month rather than in one
lump sum 88 .
Complementing government service provision
As with water, education is a service often provided by the government. Several
studies cite that the success of the affordable private schools relies on the quality of
service (that they are deemed to be higher quality than government schools). One
study has actually identified several relationships to give evidence to this otherwise
anecdotal conclusion. In Private Schools for the Poor 89 , R Baird finds an inverse
relationship between government education spending and private school enrollment,
such that higher government spending corresponds to lower private school
enrollment. Further findings include that high teacher absence in government schools
also has a major statistical link with private school enrollment.
Clearly, the absence of high quality government-provided alternatives can encourage
parents to pay for their children’s education. However, should government spending
(and consequently the quality of government schools) increase, private schools may
naturally lose student enrollment.
Further opportunities within the Education sector: Gray Ghost Ventures and
education finance
An ancillary model that has been successful within the education sector is one that
provides financing for education. The Indian School Finance Company, for
example, extends medium-term loans at market rates to affordable private schools
in India. While the schools are mostly operationally profitable, many struggle to
87 Introduction to the Gyan Shala Model, Monitor Inclusive Markets, September 2009.
88 Private Budget Schools in Hyderabad City, India, S Joshi, Gray Matters Capital, 2008.
89 Private Schools for the Poor: Development, Provision, and Choice in India, R Baird, May
2009.
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