REVIEW: Africa Ascendant-Mega Trends and Themes in Private Education Investment (PART 1)

Introduction

I met Danish Faruqui, Partner, Global Education Practice, L.E.K at the International CEO’s Summit in Brussels where he presented a TED talk on the trends and opportunities in the African private education sector based on the Africa Ascendant: Mega Trends and Themes in Private Education Investment report produced by L.E.K Consulting.

Africa, he argued has a range of fundamental drivers in place that will fuel the growth of a variety of consumer-oriented businesses, including education. The continent, he said, is a fundamentally attractive region for the education sector. There are healthy demand drivers for the education sector with every segment offering a different set of opportunities. Successful investors and operators will need to carefully craft their strategy in terms of target segments, geographic presence, and value creation levers.

The Africa Ascendant-Mega Trends and Themes in Private Education Investment report examines the advantages, landscape and regional investment attributes, trends, and opportunities that are unique to the African continent; which puts it in a perfect position for private education investment in the world today. Over the next three weeks, we will be examining a three-part series on their findings.

L.E.K. Consulting, a is 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.

The African Advantage

Here are some of the key trends from the Africa Ascendant: Mega Trends and Themes in Private Education Investment report that highlight Africa’s current global position in private education investment.

• One in every six people in the world today is African. By 2050, that figure will become one in four, and by the end of this century, nearly half of all people in the world will be African.
• Africa is not only the most populous region in the world, it is also the fastest-growing continent in economic terms; out of the top seven fastest-growing economies and five are in Africa.
• The demographic and economic dividend, in conjunction with a concentration of economic opportunities in urban centers, is giving rise to rapid urbanization — according to the UN, 15 of the top 20 fastest-growing cities between 2015 and 2035 will be in Africa.

These trends in turn are fueling consumerism and giving rise to unprecedented opportunities for consumer-oriented businesses across the continent. This large pool of new consumer spending has attracted the attention of investors and operators across categories. Highlighted below are some examples:

• As an example, the continent has ~800M mobile subscribers, and many global operators are looking to tap this potential. Airtel’s Africa arm has seen investment in the order of $1.25 billion, and is expected to pursue an IPO.
• According to the International Air Transport Association, Africa is also set to become one of the fastest-growing aviation regions in the next 20 years, with an annual expansion of ~5%.
• China and the U.S. are making significant investments in Africa in the form of infrastructure and other major projects. A range of global brands are entering the continent’s markets either through expansion or partnerships, with companies like Coca-Cola significantly raising their investments in Africa to tap into the large consumer base. Hospitality groups such as Radisson and Accor Hotels have announced significant expansion and investments in the region.
• Beyond this, African companies are going global and attracting significant investments from financial markets — as an example, Jumia, a large ecommerce company, recently had a successful IPO on the New York Stock Exchange, and became the first company originating from Africa to do so. There is also an increase in innovation, as demonstrated by a rise in the number of technology incubators in Africa.

Education: The Ultimate Consumer Good

Africa’s demographic and economic dividend is giving rise to a significant opportunity for the education sector. Education is “the ultimate consumer good,” typically a first site of investment for families increasing in affluence and a segment resistant to economic shocks.

• As economies grow, so does their demand for an educated workforce, driving enrollment ratios. Emerging economies have fast-growing university sectors, with high demand for available seats.
• Africa’s economies have historically had low GDP per capita, and its enrollment ratios have been below 15-20%. However, the strong correlation between educational attainment and economic growth means that anticipated growth in Africa is likely to require corresponding increases in educational attainment (as measured by gross enrollment in education). This increasing demand, coupled with shortfalls in public sector education provision, translates into opportunities for investors and operators.

Alongside robust demand, education businesses are also typically attractive from a business model perspective, given that they demonstrate a number of favorable characteristics. See them written below:

Real Price Growth

Education industry characteristics allow fees to grow at a higher rate than most other consumer service industries. With tuition fee growth exceeding inflation levels and remaining in line with parent incomes, providers consistently witness stable, high margins.

Resilience

Expenditure on education has grown despite economic downturns and was resilient even during the global financial crisis. This highlights a highly secure investment opportunity.

Price Insensitivity

Overall education quality is a strong influencer of decision making, taking precedence over pricing. Consumers (parents and students) are typically willing to spend more for higher perceived quality.

Long-Term Revenue Visibility

A number of factors such as a long student lifetime value, predictable pricing growth, and resilience to macroeconomic fluctuations result in long-term revenue visibility characteristics that are unique to the education industry.

Barriers To Entry

The education sector often has high barriers to entry such as complex and time consuming accreditation processes, the need for credibility and reputation building, and capital expenditure requirements. These all serve to limit competition.

Negative Working Capital

Fees are often collected in advance of delivering education services, resulting in attractive cash-flow for providers.

High ROI

The sector sees attractive margins due to cost structure and overall market demand. As education institutions are mainly fixed cost businesses, higher utilization levels drive margin growth.

Living and working across the African continent for the past five years, I have witnessed firsthand the value of education for African from all socio-economic backgrounds. There is also huge capital flight out of the continent with parents spending vast amounts of their money to education their children from school to university and beyond. There is an urgent need to build first class education institutions and infrastructure to enable African’s to spend this capital on the continent.

Next week, we are going to examine Africa’s distinct investment landscape and the characteristics that make it ripe for private education investment.

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