Social Inclusion & Human Rights

Private Equity in the Education Sector Shows Growth

education interviews
November 1, 2018

As impact investing continues to grow, private equity in the education sector has seen growth, too.

“Everyone can get behind education as an impact investment,” says Glenmede’s Jennifer Wong, CFA. “It’s an easy thing to point to and say that investing will make a real difference.”

From her perspective as an impact research analyst in private investments at Glenmede, Wong shared her insights into where private equity investors in education have been in the past and where they could go in the future, as well as the challenge of balancing impact and returns.

Precedents and Challenges

“Education is a space that private equity players have historically invested in, so that means it’s easier for investors to understand,” Wong says. “It’s not an unknown sector where it’s completely new from the ground up.”

Areas that private equity firms have focused on in the past include corporate education, training systems, vocational training programs, and for-profit education models from prekindergarten through high school. Educational technology is also gaining increasing traction from private equity investors.

It’s not hard to understand how the power of education can be used to close achievement gaps, lift communities, and raise people out of poverty. And in many cases, the impact of private equity in the education sector is tangible and easily measured. Still, the amount of capital flowing into education investments remains far lower than that being invested in other impact sectors. According to a 2017 report from the Global Impact Investing Network, just 3% of impact investing assets go toward education investments, compared to 22% of assets going toward housing and 16% toward energy.

That disparity reflects some hurdles facing private equity impact investments in the education sector. Chief among these challenges is the fact that while the goal of many education initiatives is to lower the cost of education, doing so can cap the upside in terms of the investment itself.

“That’s why it’s been hard for investors to really challenge the status quo through private investments,” Wong says. “Education nonprofits are willing to take a concessionary return to have the most impact, so they’re OK giving out things for free or having businesses test out models for free. But from my seat, this distorts the overall market and makes it harder for businesses to create sustainable models. As an investor, I’m only looking at products that generate market rates of return.”

Opportunities

Given those constraints, many private equity impact investments in the education sector focus on technology and vocational education. Education technology is often sold to schools and enterprises, where it helps decrease the cost and increase the access to education. Vocational education provides skills-based training. Innovation in education finance—such as student loan platforms and refinancing companies—is another area that offers both the impact and the return required by private equity investors.

“Companies targeting lowering rates on student loans have received private equity backing in the past few years, which means some investors believe in their ability to generate return,” Wong says. “And you could also make the argument that on an impact basis, they have extended lower costs of education to more people. However, critics would also be quick to point out that while lower costs of education are now available, these products are not targeting those in most need.”

Wong says she expects to see greater interest in impact investing in the education sector by private equity firms going forward, as well as a convergence between pure impact investors and more traditional financial players.

“There’s a huge amount of money flowing into impact investing,” she says. “You have to believe that for all of this to work out, a small impact investing fund that has maybe $50 million or $100 million in their first fund will be able to sell some of their assets in the future to either larger impact funds or larger traditional private equity funds.”

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