Over the past decade some fascinating developments have taken place in the global education market including the growth of a number of chains of budget private schools in India and Africa and the extension of microfinance into education.  Many of these developments are being funded by a new generation of impact investment companies who make investments which are designed to address social or environmental challenges while at the same time generating a profit.  This is not the same as socially responsible investment, which looks to avoid investments in harmful companies.  Nor is it about encouraging companies to improve their corporate social responsibility.  Instead, impact investors aim to invest in businesses that can provide scalable solutions that governments or purely philanthropic interventions cannot reach.  The growth of impact investment suggests that the resources of government and philanthropy are simply not sufficient to provide sustainable solutions to many of the world’s most complex problems.

One organisation which has led the growth of impact investment in education is Gray Ghost Ventures(GGV), an impact investment company based in Atlanta, USA.   As one of the earliest private investors in microfinance, GGV is now building on this experience to provide market-based solutions to entrepreneurs who are addressing the needs of low-income families in developing countries, whilst at the same time providing an attractive financial return.  GGV’s focus areas include: microfinance, social venture investment and affordable private schools.

After recognising the potential in the rapidly expanding market for affordable private schools across India, GGV identified financing as one of the key barriers to the growth within the sector.  To address this need, they established the Indian School Finance Company(ISFC) to provide capital to low-cost private schools and to help school proprietors bring educational opportunities to low-income communities across India. The average loan is US$24,000 and they are being used to expand school infrastructure and capacity. This allows the school to increase enrolments which increases school revenue and therefore the school’s ability to repay the loan.

To complement the provision of these financial services, GGV’s charitable arm Gray Matters Capital(GMC) is looking to strengthen the ecosystem which surrounds the emerging affordable private school sector to help ensure that these schools offer quality education in a sustainable manner.  Again, sustainability is identified as a key part of GMC’s social philosophy and the cornerstone of its initiatives.  Its Affordable Private School Initiative therefore seeks to expand the knowledge base and mobilise financial resources as a means of enhancing and monitoring the contribution of the private sector.  A business model has already been developed which identifies the following unique qualities that define an Affordable Private School (APS): APS are managed by local entrepreneurs who oversee operations and instruction and ensure teachers are in the classroom; the combined business and academic model makes these schools a sustainable, market-based solution to increasing the availability of low-cost, higher quality education for low-income populations; families of APS students are paying clients with rights to insist on quality; APS are sustainable enterprises, independently managed, providing a reliable source for education; APS generate market demand and drive intense competition through school selection; and finally APS are social enterprises and put an emphasis on quality, efficiency and performance, justifying the modest tuition charged that allow them to become sustainable enterprises.

To help address the need for more information concerning the nature and quality of services which these schools provide, GMC is also looking to develop a sustainable rating system to help stakeholders better assess schools and the quality of education being provided.  If this rating system develops into an industry standard then this will hopefully encourage schools to continually increase their rating score by improving the quality of services they provide.  Finally, GMC have also launched EnterprisingSchools.com which it hopes will develop into a global online community where educational entrepreneurs can communicate, share expertise and develop best practices.

Following the lead taken by impact investors, more established education companies are also now beginning to take an interest in this market.  Leading the pack is Pearson which recently launched a $15 million Affordable Learning Fund which will invest in private companies committed to innovative approaches, sustainable business models and improving learning outcomes for the poorest families in the world.    Accoprding to Sir Michael Barber, Pearson’s Chief Education Advisor and Chairman of the new Fund

“Low-cost private education is an important, complementary element of education in developing countries and should be seen as an active partner with governments looking to ensure all children have access to a high quality education. We are convinced that affordable schools, operated on a for-profit basis, can make a big difference.”

According to a report published by JP Morgan in November 2010 (Impact Investments: An Emerging Asset Class), the potential size of investment in the primary education market alone over the next 10 years could be $4.8–$10bn with an estimated profit opportunity of $2.6–$11bn.  As these for-profit chains begin to develop and expand we should therefore expect many more companies to follow Pearson’s lead.