REVIEW: Africa Ascendant-Mega Trends and Themes in Private Education Investment (PART 3)

In 2013, inspired by the trends in the Indian education sector, I did a deep dive into the Nigerian education market. To my astonishment, I discovered the education and skills sector in Nigeria offered significant investment and partnership opportunities in almost all areas including higher education, e-Learning and vocational skills training. Nigerians are reputed to be the largest number on the African continent with higher education degrees (Masters, MBAs, and PhDs). 

In 2010, they spent an estimated N246 billion or $1.54 Billion on Education in the United Kingdom and the United States! Core areas of interest included Information Technology (IT) and the requisite certifications, Banking, Finance and Accounting, Law, Engineering and Computer Science, Oil and Gas and Media, Design and Communication. After five years of living and working in Nigeria, I now have deeper understanding and appreciation of why investing in education is a high priority for them.

The Africa Ascendant: Mega Trends and Themes in Private Education Investment report produced by L.E.K Consulting simply confirms the trends and opportunities across the African private education sector.

If you are looking to leverage this opportunity, it is imperative that you understand the Nigerian and African education landscape, preferred methods of engagement, key challenges and potential areas for collaboration.

To conclude this series, we will be examining the trends and opportunities that place Africa in a unique position for private education investment.

Trends To Watch In African Education Sector Investment

A close look at the data over the past decade suggests that there are four main themes underpinning the growth in investment activity in the African education sector. These themes are likely to drive investment in the coming years.

Platform Building

One playbook for investors and operators is scaling through the acquisition of multiple assets to build out a platform. Platforms supported by financial sponsors lead to scale benefits and bring professionalization to what are often family-run businesses.

The acquisition of an anchor asset can often build strong teams. Platforms can then invest in robust analysis of local demand-supply dynamics to inform decisions on capacity and pricing.

Platforms can also support operators to achieve economies of scale, optimize EBITDA margins and enable a coordinated approach to student acquisition. A platform strategy helps providers expand their geographic footprints and de-risks the business through geographic diversification.

Actis, for example, launched a major pan-African higher education initiative, Honoris United Universities, in 2017. It currently has nearly 60 campuses across 10 universities in nine countries across Africa with ~32,000 students. The network brings together tertiary education institutions across South and North Africa offering French and English degrees through both on-campus and distance learning. Honoris also leverages partnerships with ~60 universities across the United States and Europe. Actis has invested an estimated $275 million in building the platform.

Similarly, KMR Holdings is a French-language, multidisciplinary private higher education network based in Morocco and Senegal.

It has three campuses and about 8,000 students. Leading African private equity firms Development Partners International (DPI) and Mediterrania Capital Partners (MCP) are stakeholders in KMR. Helios also invested in KMR in 2018.

Global Brands And Branch Campuses

Global brands are expanding to Africa through university campuses. These give a global provider access to the continent’s growing education market, while helping plug shortages in supply and quality.

Lancaster University partnered with Transnational Academic Group (TAG) to open the first British university branch campus in Ghana in 2013. The Accra-based institution gives students access to a variety of undergraduate and postgraduate programs taught by local and international faculty from Lancaster in the UK.

Given the growth potential and demand for quality education in the continent, there is an increasing interest from French higher education operators to tap the market in Francophone Africa through acquisitions or sourcing partnerships and pathways.

Similarly, global higher education company Laureate International Universities acquired University International Casablanca in 2010 (since acquired by KMR in 2018), while United States-based Online Program Management (OPM) provider 2U’s acquisition of GetSmarter in 2017 reflects the presence of global education operators on the continent.

Local Consolidation And Geographic Diversification Across Africa

Large local operators such as ADvTECH, Curro and Stadio are continuing to consolidate in local African markets. These providers are diversifying into other regions and countries within Africa, scaling through the acquisition of multiple education companies across subsectors.

This strategy is primarily aimed at growing an operator’s geographic footprint, and also confers benefits in terms of expanded scale and better student acquisition practices.

For example, ADvTECH, the largest private higher education company in South Africa, has grown through this type of regional expansion. The Johannesburg-listed company bought a 51% stake in the University Of Africa, a private distance-learning university based in Zambia, in 2017.

More recently, the company announced a further expansion into Kenya and Uganda and added nine schools, five campuses, boarding facilities and approximately 4,100 students to its portfolio. This includes the purchase of the Makini group of schools in Kenya (managed by Scholé). The company also supported the expansion of another South Africa- based school brand, Crawford Schools, into Kenya last year.

ADvTECH’s expansion strategy is supported by a $22 million investment from the International Finance Corporation in 2016. The company plans to further diversify geographically and generate about 30% of its revenue from other countries in sub- Saharan Africa.

Innovation Driving Venture Capital Investment

Globally, education is seeing an increasing interplay between technology and education, and Africa is no exception. The potential of technology is found not just in expanding access exponentially but also in ensuring convenience of education for working adults who lack degree qualifications. Given the demand- supply imbalance in tertiary education, African education could see faster growth of technology-embedded learning versus other emerging markets.

Moreover, the challenges facing the education sector in Africa— which has a largely rural and poor populace, highly varied governance and regulation between countries, rapidly changing economies, and diversity in linguistic and ethnic practices — also make it a hotbed of innovation.

Private operators address the unique challenges of operating in the region by developing similarly unique business and delivery models that utilize technology. These innovations in operating models are not confined to Africa alone and can be leveraged within education internationally, and their lessons can also be applied to other sectors.

This replicability has made these innovative offerings the object of venture capital interest, attracting investments from global and local funds.

One example is Andela, which helps young people become software developers through a four-year program, during which they receive six months of intensive training and then commit to three and a half years as remote workers for global technology companies. In 2016, Andela received $24 million from the Chan Zuckerberg Initiative, a fund set up by Facebook’s founder and his wife.

Other investors in the company include Spark Capital, IFC, Omidyar Network, Learn Capital and CRE Ventures. Similarly, Kenya-based Eneza Education provides web, SMS and Android- based supplementary education offerings, including lessons, quizzes and discussions, to nearly 5 million online learners. Gebeya Inc., an Ethiopian company that serves as a provider of IT talent in Africa, has about 4,000 software developers in its network.

On The Horizon: Emerging Opportunities For Investors And Operators

Four High-Potential Opportunities

Within the context of significant untapped potential and growing demand in Africa, four opportunity areas are likely to have high potential in the medium to long term; these include (I) mid-price / budget schools, (II) working adults, (III) supplementary education and (IV) education technology.

Mid-Price / Budget Schools

Premium school businesses continue to demonstrate steady growth and high operating margins and are typically resilient to economic volatility. However, the market remains fragmented, and the addressable market is often limited to the top income tier of the population in high-growth urban centers.

The mid-price / budget K-12 offering, on the other hand, continues to command significant demand by reaching a different affordability cohort. Operators could drive value in mid-price and budget K-12 schools by focusing on these aspects of the business model:

  • Teacher supply: There is a shortage of quality teachers in Africa, and an innovative solution to address this problem is to hire relatively inexperienced teachers and then control for variance by introducing technology.
  • Technology: Technology is often leveraged to equip relatively inexperienced teachers to follow a well-defined and codified curriculum supplemented with assessments.
  • Infrastructure: Another way to lower costs is for operators to keep infrastructure spending low. By steering clear of flashy campuses and investment in expensive facilities such as football fields, schools can lower both capex and opex and in turn become more affordable. These schools do not have to forgo the use of specialized facilities altogether; sharing or renting facilities is one way to provide a holistic offering at a dialed-down cost.
  • Academic Outcomes: While there is little differentiation in this market currently, a very strong focus on outcomes would help operators drive value. In markets like India and Brazil, where university admissions are competitive, there are examples of scale-budget and mid-price K-12 education chains focusing on outcomes-based education, such as Sri Chaitanya and Narayana in India, and Pensi and Elite in Brazil. Select examples in Africa include Nova Pioneer, Enko Education and Spark Schools.
Working Adults

There is significant demand for postsecondary and tertiary education, given low gross enrollment ratios. Demand for skilling far exceeds supply, with the applicant-to-seat ratio in some African countries as high as three to four times the number of applicants for each available seat.

In addition to a traditional high school leavers, there is a sizable opportunity in Africa to attract working adults back to higher education and non-degree skilling. The market opportunity for adult education is considerable, given that less than 20% of the working-age population in major African markets, such as South Africa, Senegal, Kenya, Nigeria and Ghana, holds a tertiary degree.

To tap into this unmet demand, providers can offer distance learning, online programs, skilling initiatives, and technical and vocational education and training (TVET). The opportunity in digital skilling alone is estimated at $130 billion through 2030 in sub-Saharan Africa.

Supplementary Education

Given the poor quality of public education provision, there is a large addressable market for after-school tutoring and other supplementary education, with moderate to high demand driven by the willingness of affluent parents to invest in ancillary education services.

A large proportion of students (50-60%) enroll in some form of after-school tutoring in large markets like Egypt, South Africa and Nigeria. Models are emerging to meet various kinds of consumer demand, from traditional brick-and-mortar providers like Kumon, a private tutoring provider operating through a franchise model, to hybrid education companies such as Green Shoots to fully online offerings like Tyro, an Egyptian startup that connects students with qualified instructors through one-on-one online sessions.

Unlike other regions, such as China or Latin America, Africa has a greater prevalence of English-medium education, especially in private schools. There are opportunities for English-medium supplementary education providers with an Edtech product to pursue a business-to-consumer opportunity in the region.

Education Technology

Technology and tech-based startups receive significant traction in Africa, with startups raising a record $725.6 million in 2018. Technology is playing an integral role in the education sector globally, and given the issues around access and quality in Africa and an emergence of technology startups on the continent, there is a greater role that technology can play in African education.

While developed markets have traditionally seen scale business- to-business models, emerging markets have seen potential in the business-to-consumer space, with several large EdTech providers emerging in the supplementary education space and achieving high valuations — for example, BYJU’s in India, VIPKid in China, and Stoodi and Viamaker in Latin America.

Edtech models will likely have strong potential in sectors such as language learning, supplementary content, classroom tools and content, and test preparation.

Value Creation Levers For Investors And Consolidators

The private education market has significant demand and favorable business model characteristics. In Africa, the education sector is highly fragmented, with a significant opportunity for consolidation and subsequent value creation. There are four principal levers education investors can use to create value in Africa post-acquisition:

Pricing

Investors can add value by optimizing pricing through detailed understanding of local demand-supply dynamics and competitive differentiation.

Student Acquisition

Investors can help run professional student acquisition services by collating a platform operator’s student acquisition efforts into one central, efficient function. This includes robust lead tracking and conversion, as well as appropriate academic touch points with prospective parents to communicate value.

Customer Communication, Satisfaction And Advocacy

Word of mouth from family and friends is the biggest source of leads in most education businesses. Private sector operators can run frequent customer satisfaction surveys, opening up a channel of communication between an education provider and the parents paying for the company’s services, while also giving parents a forum to advocate changes or improvements to the provider’s offerings.

Linkage With Employers

 Private-sector operators can act as a vital go-between for corporations and educational institutions, ensuring that employers have a pipeline of qualified talent, and improving employability for graduating students, thereby driving reputation.

Conclusion

Africa has a range of fundamental drivers in place that will fuel the growth of a variety of consumer-oriented businesses. The continent has also demonstrated significant investment potential and activity and is now gaining global prominence due to the growth of international businesses and foreign investments.

Given its economic and demographic trajectory, Africa is expected to continue to offer substantial opportunities for investors and operators in education. The continent is a fundamentally attractive region for the education sector given lower latent levels of attainment and increasing private penetration. These, alongside Africa’s economic and demographic trajectory, are expected to provide strong tailwinds for growth.

There are healthy demand drivers for the education sector, but regional variations will be important in considering strategy, with every segment offering a different set of opportunities. Successful investors and operators will carefully craft their strategy in terms of target segments, geographic presence, and value creation levers.

I want to thank Danish Faruqui, Partner, Global Education Practice, L.E.K, who I met at the International CEO’s Summit in Brussels, for his inspiring talk and this very valuable report. I urge you to download and read the report.

See Full Report Here: https://www.lek.com/sites/default/files/insights/pdf-attachments/Africa-Ascendant-2019.pdf

This report was created by L.E.K. Consulting, a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. Founded in 1983, L.E.K. advises and supports global companies that are leaders in their industries — including the largest private- and public-sector organizations, private equity firms, and emerging entrepreneurial businesses. Visit their website here for more information.

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