Members of the Education Finance Network recently traveled to San Francisco to participate in a panel discussion entitled “How investors can drive access to Education for all children”. The conversation took place during SOCAP22, a four-day in-person conference convening the largest and most diverse impact investing community in the world.

The session brought together two representatives of Education Finance Network member organizations: Abdul Mohamed, Head of Education in East Africa at Acumen, a nonprofit impact investment fund making equity investments in early-stage companies that provide a product or service to the poor, and Batya Blankers, CEO and Co-Founder of Chancen International, which utilizes Income Share Agreements (ISA) to offer vulnerable youth in Africa access to vocational and higher education programs with strong transition to employment track records. It was moderated by Kusi Hornberger, Partner at Dalberg, who manages the Network together with Opportunity International Edufinance.

The session gathered a variety of stakeholders, including impact investors and foundations, as well as practitioners and researchers, working in low- and middle-income countries across the world.

Education is underrepresented in the impact investment market

The speakers called attention to the current investment gap to achieve Sustainable Development Goal SDG4 (Quality education) and discussed opportunities to invest in promising solutions and leverage innovative financing mechanisms.

Before the COVID-19 pandemic, the investment gap to achieve SDG4 represented $250 billion annually, but that number is likely to have increased given the learning losses experienced since then. Despite the increasing magnitude of the problem, only 3% of assets under management in the impact investment market are being allocated to education, and investment has shrunk 7% year-on-year since 2015.

Why is there reluctance to invest in education?

Impact investors often express interest in education but argue that there are not enough viable business models in the space to justify developing a full investment strategy.

According to Abdul from Acumen, reluctancy from investors to engage in this space often results from a misconception of what investing in education really means. Investments in education are often perceived as investments in low-cost private school chains. However, there are a number of other services that can improve access to better-quality education and provide attractive business models for investors. Examples include ancillary service provision, such as EdTech and teacher training, and education finance directed at students and schools.

Batya from Chancen International pointed out that investing in education often requires patient capital. These investments don’t frequently fit into the success framework that has been built to evaluate other types of impact investments, as they require consideration of the tremendous intergenerational effect of investing in education. It is essential that investors look beyond traditional frameworks used in other areas in order to assess the financial and social returns in this space.

Opportunities for investors

A number of trends in pre-primary through secondary schooling (K-12) provision and vocational training may offer investable opportunities for funders interested in education. These are two notable avenues:

• Income Share Agreements as enablers of vocational training: Africa will have a huge population boom and professionals must be equipped with the skills required to enter the labor market. ISAs are an instrument with great potential to enable students to access post-secondary education. However, to ensure that ISAs are scalable and follow fair and ethical principles that defend students against predatory lending, Chancen International advocates for providers to work with policy makers to regulate the space.
• Harnessing the power of EdTech to address pain points in a changing system: In the K-12 space, changes to a new competency-based curriculum in countries in East Africa, as well as perceived challenges in public education, have led to an increased demand for private supplementary tuition. This has opened the door for EdTech ventures such as Silabu, a recent investment from Acumen that created a web-based platform to help students from all walks of life access top tutors on demand.

Linking impact with results helps align incentives

Financing mechanisms that link impact with results help achieve desired outcomes by aligning the interests of all key stakeholders and drawing on the strengths of each participant to achieve the target outcomes.

• In the case of ISAs, Chancen International’s model aims to align the incentives between the investor, students, and the education provider. Chancen International screens education providers against standards of quality and market relevancy, and only finances students who receive their education from these partners. This aims to decrease the risk of the student’s financial commitment by ensuring strong educational outcomes that lead to employment. If the students are successful, the fund is successful. If the fund is successful, high-quality education providers will have access to stable cash flows through sustainable student financing mechanisms.
• Acumen’s Education Facility has an embedded performance-based financing mechanism, where Acumen’s return is contingent on the ability of its investees to perform both financially and against impact metrics. Abdul acknowledged that this can be challenging and that funders need to be fair and hold investees accountable only on impact metrics that are under their control. Doing that may require relying on proxy measurements for improved learning outcomes.

The panel concluded by calling on investors to increase their risk appetite and step up to bridge the investment gap in education. Education is considered a catalytic investment, given its close links to other Sustainable Development Goals such as SDG1 (No poverty), SDG3 (Good health and well-being) and SDG 5 (Gender equality). Impact investors who want to advance the 2030 agenda must consider these linkages and urgently increase resource mobilization to address gaps in this space.

More About The Members and Education Finance Network

Chancen International offers vulnerable youth in Africa access to vocational and higher education programs with strong transition to employment track records. Through Income Share Agreements (ISA), Chancen International’s vision is to see societies transform through the active participation of skilled individuals who become changemakers, innovators, entrepreneurs, and leaders. ISAs provide the upfront financing necessary to cover a students’ education and graduate repayments are income based, after a set threshold.

Acumen Fund is a nonprofit impact investment fund making equity investments in early-stage companies that provide a product or service to the poor. It invests across the agriculture, education, energy, and healthcare sectors in Latin America and the Caribbean, North America, South Asia, and sub-Saharan Africa.

The Education Finance Network was developed with a mission to convene diverse education stakeholders with a focus on leveraging non-state resources to create inclusive, high-quality education systems that assist the one in three children that are out of schools in low- and lower-middle income countries globally.

If you’d like to learn more about the work of the Education Finance Network and apply for membership, please reach out to educationfinance.network@dalberg.com to know more.