House View by the Chief Investment Office

Education services Growing demand and new means of learning are opening up opportunities for private companies.

28 March 2017

"We’re looking to bridge the gap the government is simply not filling."

says Marieme Jamme, the founder of iamtheCODE academy

Marieme Jamme’s mission is to rescue what she calls the "missing millions" - young girls who don’t have access to education or training. A successful African tech entrepreneur, she also founded iamtheCODE, an academy that teaches computer programming to vulnerable young girls. Having been trafficked to Europe at 15 years of age to work as a prostitute, Jamme believes she could have avoided this fate if such educational opportunities had been offered to her.

The shortfall Jamme identifies is a global one. In emerging markets, an expanding middle class is becoming ever more aware of the economic rewards offered by education. In Brazil, for example, a university graduate can expect to earn around 130% more than a less educated peer, according to data from the OECD (Organisation for Economic Co-operation and Development). The average premium for rich nations is a more modest but still hefty 48%.

"This large wage advantage appears to stem partly from the relatively short supply of college graduates in many developing nations."

says Daniel Sanchez Serra, an OECD education analyst.

While nearly two-thirds of US citizens attended college as of 2013, just 31% of Brazilians did and 19% of Indians. That leaves plenty of room for catch-up, especially as climbing incomes mean that more people are able and willing to pay for schooling. For example, the percentage of family income devoted to education rose 13-fold in China between 1985 and 2012, figures by Xueda show.

The changing face of education

"Governments are still the dominant force in basic education. They ensure that their citizens have basic literacy and numeracy, and in many cases enable them to pursue higher academic education."

says Hyde Chen, a strategist in UBS’s Chief Investment Office.

Meanwhile in developed nations, a more fluid employment market encourages workers to continue training long after finishing formal education. US workers under 32 years of age typically change jobs four times in their first decade in the labor market, twice the amount of career switching of the previous generation, according to a 2016 LinkedIn study. In addition, advances in technology, including robotics and artificial intelligence, can be expected to displace more workers in coming decades, encouraging a greater number of them to acquire
new skills.

Globally, demand for education and training is growing at roughly twice the pace of economic output. That has left governments struggling to keep pace, especially at a time of high fiscal deficits and rising debt in many countries. Increasingly, the spending gulf is creating opportunities for corporations.

"It is in the areas of professional training, language tuition, and standardized testing that governments are playing second fiddle to a burgeoning number of private sector firms. And the share of the higher education market that these private firms have is also expanding fast." In Brazil, for example, increased demand for higher education is partly being satisfied by for-profit firms. Three-quarters of Brazil’s seven million university students currently study in private institutions.

A technical revolution brings education to the masses.

"The difficulty of getting to a classroom made it unfeasible for many people to acquire education or training, whether they lived in remote areas or because they needed to work during the day."

says Gerard Robinson, an education expert at the American Enterprise Institute.

Technology is a major force enabling companies to access an even wider market.

Businesses like Kenya-based OneUni are taking advantage of the near-universal use of cell phones in Africa even among low income groups. Partnering with regional universities, OneUni provides interactive courses designed for mobile devices.

Meanwhile, online tutorials can reach students in a more cost-effective way, with a low incremental cost per additional student. This is a potential recipe for higher profit margins. A study by former Princeton University President William Bowen found that switching from a traditional college teaching model to a hybrid online format could cut staffing costs by 37-57%. And that did not include the potential savings from needing fewer buildings on campus.

The efficiencies of this approach can be gauged from the experience of the Khan Academy, a non-profit online tuition provider that serves 15 million users per month on an annual budget of just USD 24m and with a staff of just 100 people.

Marieme Jamme’s iamtheCODE academy has thus far offered a lifeline to 2,000 girls in Africa who have completed her coding course. While she offers such training for free, she believes that private-sector education service providers "could be the savior" for millions more who consider education the key to success.

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