OPPORTUNITY Megatrends and KNOCKS opportunities in education For many years, the education sector has been poorly understood, captured as a subset of business services or the media sector. Education does however deserve more attention. It continues to be a major area of investment for governments around the world, with increasing opportunities for private sector operators. Here, we focus on some of the key megatrends impacting the education sector globally and highlight some of the resulting opportunities.

Our starting point is a recap of the objectives 1. DECENTRALISATION AND MARKET of educational reform. Cost containment and improvement of educational outcomes have BASED REFORMS IN PRIMARY been key factors shaping education trends in AND SECONDARY EDUCATION the developed world for a number of years, whilst in developing markets, policy makers 2.GROWING PARTICIPATION RATES are trying to determine how access to IN PRIMARY, SECONDARY AND education services can be extended to a HIGHER EDUCATION greater proportion of the population.

Against this background, despite current 3.THE GROWING TECHNOLOGY pressures on public spending in developed INFRASTRUCTURE AND markets, public and private spending on ASSOCIATED DIGITAL CONTENT education is increasing, with growth driven by AND RESOURCES IN EDUCATIONAL a number of powerful, long-term global megatrends. INSTITUTIONS

Areas of focus 4.A FOCUS ON EFFICIENCY AND for educational reform in the CHANGING FUNDING MODELS COST developed world What is (IN DEVELOPED MARKETS) the most cost effective way to organise the 5.INTERNATIONALISATION AND educational system? STANDARDISATION IN EDUCATION

OBJECTIVES OF EDUCATIONAL These megatrends suggest that over the long REFORM term, the education sector will continue to ACCESS QUALITY OF How can access OUTCOMES benefit from robust growth, at a time when to services be How can learning many economies in the developed world are extended to cover be maximised a greater share of and standards struggling to emerge from recession, the population? improved? creating opportunities for the private sector.

1 An OC&C Insight Opportunity Knocks MEGATREND #1: DECENTRALISATION

DECENTRALISATION AND MARKET BASED REFORMS IN PRIMARY AND SECONDARY EDUCATION

Educational reform in primary and scale and experience benefits. For example, Sweden: Students in Compulsory Education secondary education in the developed Kunskapsskolan now owns and operates 33 in Independent Schools world, such as Voucher Schools in Sweden, schools in Sweden and is the sponsor and % of Students Enrolled Charter Schools in the US and Academies founder of the Learning Schools Trust in the and Free Schools in England, is emphasising UK, which recently opened three new 10% supply side reforms to promote parent / Academy schools in south west London. 8% student choice and competition in the Introduction of the voucher schools market. Decentralisation is leading The chart on the right highlights the growth programme in Sweden to more decision making and budget control in the penetration of independent schools 5% being devolved to schools, whilst funding operating under the voucher system in pools are increasingly being opened to both Sweden, where about 10% of lower 3% public and private providers. secondary aged pupils now choose to attend independent schools (for upper secondary 0% As more budget responsibility is devolved to students, the figure is over 20%). There is schools, suppliers to educational institutions, increasing evidence that the increased 1991-92 1997-98 2001-02 2006-07 2009-10 such as the publishers of text books, are competition created by the emergence of increasingly facing a more fragmented voucher schools in Sweden has increased Source: The Swedish National Agency for Education buying environment, with resulting levels of educational achievement, as implications for how they manage their sales highlighted in a recent study commissioned force and other channels to market. by The Institute of Economic Affairs. This suggests that these new schools are here to Whilst the implementation of market based stay. Closer to home, 24 new Free Schools reforms promoting growth in private opened for business in England in education provision are creating September 2011, with applications for an opportunities for the private sector, private additional 200+ Free Schools now being providers have had to focus on developing considered by the Department for new models to deliver operational efficiency, Education. Whilst Free Schools currently as revenue growth is typically capped. This represent only a fraction of the overall reflects the fact that in most cases of market number of schools in England and will based reforms, privately run (including for- continue to face challenges in areas such as profit) schools receive public funding for planning and finding suitable premises, they each pupil educated on the same terms as could become an increasingly important Local Authority or municipality schools. As a feature of the schools landscape in England result, revenue growth in the form of annual over the coming years, provided that they tuition fee increases has not been possible. can demonstrate that they can deliver a Despite this constraint, a number of private sustainable improvement in academic school groups have emerged to explore outcomes.

An OC&C Insight Opportunity Knocks 2 MEGATREND #2: PARTICIPATION

GROWING PARTICIPATION RATES IN PRIMARY, SECONDARY AND TERTIARY EDUCATION

Tertiary Enrolment Ratio and Our work in the education sector around the A number of private operators in the GDP per Capita, 2008 world has highlighted the strong correlation education sector are benefitting from this between GDP growth and participation in megatrend. For example, Cognita owns 90 USA education. Using tertiary education as an and operates 54 schools (nurseries, pre- 80 New Zealand Iceland example, the top chart highlights tertiary prep, junior and senior schools) across the 70 Hungary Sweden enrolment and GDP per capita in 2008 for a UK, Europe and South East Asia, including Netherlands number of OECD countries. Here, GDP per , and Singapore (with 60 Ireland capita is shown on the basis of purchase new schools added to the Cognita portfolio UK 50 Croatia power parity. Understandably, enrolment is in these countries over the past four Cyprus 40 higher in developed economies such as the years). During this period, Cognita has 30 Brazil US, New Zealand and the Netherlands than experienced rapid growth in revenues Enrolment Ratio % emerging economies such as Pakistan. from £65 million in the financial year 20 Bhutan ending August 2007 to £151 million in the 10 Pakistan We have also highlighted the historical 2010 financial year. Ethiopia 0 change in tertiary enrolment ratios for a 0 10,000 20,000 30,000 40,000 50,000 number of countries (bottom chart). This Of course, in many markets, the recent GDP per Capita $ PPP highlights the rapid growth in tertiary recession has adversely impacted the Source: UNESCO, IMF enrolment in those markets with faster disposable income of aspiring middle growing economies. For example, in Brazil, classes, with some parents switching their the growth in GDP per capita has been children out of private schools and back into Tertiary Enrolment Ratio and accompanied by an increase in tertiary public education. During the recession GDP per Capita, 1995-2009 enrolment from 15% in 2000 to 35% in therefore, a good understanding of price

90 2008. Poland and to a lesser extent , elasticity was required to determine the USA 2009 have experienced similarly rapid growth, precise impact of the economic downturn on 80 2005 1995 whilst in contrast, the US has experienced private school enrolments. 2009 70 2009 much more gradual growth in the proportion 2005 2005 of the population attending tertiary Another example of the opportunities 60 POLAND 2000 SPAIN education institutions. associated with growing participation rates 50 2000 1995 can be seen in the higher education sector. 40 Quite simply, as average household income In markets such as Turkey, Romania, 2008 30 1995 rises, the number of households above the Bulgaria, the Czech Republic, Slovakia and Enrolment Ratio % Enrolment 2005 BRAZIL 20 private education affordability threshold Croatia, private providers account for about 2000 rises more quickly. Later on, as countries 15% of students enrolled in higher education. 10 become wealthier, the growth in their However, these private higher education 0 tertiary enrolment ratio decreases. institutions have contributed 0 10,000 20,000 30,00040,000 50,000 disproportionately to enrolment growth in GDP per Capita $ PPP This trend is understandably contributing to these markets in terms of new university Source: UNESCO, IMF a faster rate of growth in spend on education places created (over the period 2000 in emerging economies, with regions such as through to 2008). Laureate, the Asia, Eastern Europe and South America, international operator of private universities, expected to experience growth in public was able to benefit from these trends, by expenditure on education increasing by up to entering into a partnership with Bilgi 12% per annum from 2010 to 2015, University in 2006, thereby tapping into this compared to 5% per annum in North growth. Bilgi University is one of the largest America and 4% per annum in Western private universities in Turkey, with 11,000 Europe over the same period (chart on p.4). students enrolled.

3 An OC&C Insight Opportunity Knocks It is worth highlighting that even in Public Education Spend Over Time developed markets, where growth in US$bn enrolment will be limited, robust growth in CAGR CAGR public expenditure on education is expected, 2000-10 2010-15F despite the prevailing challenging fiscal Global +6.6% +4.9% environment. This reflects a continued and 3,288 Africa +5.8% +2.7% growing focus on educational outcomes, 26 52 Middle East +2.3% +6.8% with a corresponding increasing emphasis 84 on assessment. For example, in 2000, the 169 Oceania +12.3% +5.4% Programme for International Student Eastern Europe & CIS +18.2% +12.3% 236 Assessment (PISA) at the OECD began South America +13.1% +7.9% tracking the academic attainment of 22 2,583 children by the age of 15 in 32 countries, 37 506 Asia +5.6% +6.2% with an emphasis on Maths, Science and 64 English. The most recent PISA assessment 95 162 completed in 2009, highlights the poor 24 1,980 performance of the US (ranked 14) and the 29 374 UK (ranked 20) in 2009 relative to other 43 OECD countries. 60 1,037 Western Europe +7.8% +3.8% 62 261 In the UK, despite a gradual improvement, 13 over half of secondary school pupils in 30 1,369 863 England continue to leave school without 5 20 18 Grade A*-C GCSEs including Maths and English 217 725 47 (the government’s target for school leavers aged 16). As a result of these poor academic North America1 +6.6% +4.9% standards, the UK government continues to 409 777 966 1,178 commit in excess of £3 billion per annum to 615 the Skills Funding Agency, to fund adult literacy, numeracy and vocational skills 2000 2005 2010 2015F training, with much of this funding directed to recent school leavers. Source: IMF, EIU, UNESCO

An OC&C Insight Opportunity Knocks 4 MEGATREND #3: TECHNOLOGY

THE GROWING TECHNOLOGY INFRASTRUCTURE IN EDUCATIONAL INSTITUTIONS

The adoption of Information Communication innovation is resulting in greater adoption of from this trend. For example, SMART Technology (“ICT”) is changing the education digital content and resources, as people Technologies, the leading provider of IWBs landscape, enabling new methods of delivery increasingly believe that the internet can make has experienced annual revenue growth of and improved learning outcomes. e-Learning a difference to educating children. Hence the 30% from 2009 to 2011, with revenues is becoming increasingly prevalent as online success of the Khan Academy, in the US, which increasing from $468 million to $790 million. platforms and access continue to improve, uses video lectures to enable lecturing of During this period, unit volumes of IWBs whilst learning aids like interactive white children outside traditional class time, with shipped by SMART increased from 306,000 boards, mobile devices and educational class time focused on tutoring. Whilst only a to 406,000. Meanwhile, for potential software create a better learning handful of public schools adopted the Khan investors, a buy-and-build strategy is environment, often leading to improved Academy methodology in the last school year, potentially interesting as scale is likely to academic outcomes. In many cases, many other public and private schools are become increasingly important as ICT in deployment can occur very rapidly. now expressing an interest. education becomes widespread.

Key growth drivers include the increasing ICT has the potential to deliver significant Whilst we do not believe that the adoption of sophistication and penetration of ICT globally, buy-side efficiencies including: (1) Scale and digital content and resources by education coupled with innovation in the sector. In many operational efficiencies both within and institutions is yet at a tipping point and cases, governments have set aside ring fenced across regions through resource sharing and recognise that digital penetration varies funding to support adoption of both hardware e-Learning; (2) Improved delivery, flexibility enormously by market, the increasing and digital content. For example, during the and quality of education services (for adoption of ICT is creating challenges for 2000s, there was a significant increase in the example, through adaptive learning some operators. For example, publishers of penetration of PCs and other ICT infrastructure software), particularly in areas with low traditional print-based textbooks need to in schools in England, with a resulting increase access; and (3) the delivery of corporate invest in digital propositions for the medium in the adoption of digital content, due to the training more cost effectively. Providers of to long term, to offset the threat presented provision of funding in the form of e-Learning ICT services, ICT outsourcing providers and by start-ups and other market entrants, such Credits by the government. Classroom e-Learning platform providers will all benefit as Espresso Education in the UK. penetration of interactive whiteboards (IWBs) in the UK increased from 15% in 2001 to 85% Interactive White Boards Sub-Market by Region, 2004-12F in 2009, with investment fuelled by the US$m additional funds provided by government. New private ventures such as Espresso 2,819 CAGR Education (established in 1997) were able to 2004-12 benefit from these investments – Espresso Education is now one of the leading providers +23% 2,069 of digital curriculum in the UK, with its products used in over 10,000 schools. 1,731 ROW +34%

1,307 1,020 Looking forward and as outlined in the chart opposite, whilst the market for IWBs in the UK 838 511 is expected to experience little if any growth 138 170 UK 0% through 2014 due to the high level of 546 345 172 167 170 911 918 US +20% penetration, other regions will see more rapid 170 624 growth. At the same time, continued 209 323

2004 2006 2008E 2010F 2012F IVB Classroom 0.8% 2.3% 4.4% 7.4% 11.1% Penetration

Source: Datamonitor, DTC, Cairneagle Associates, IDC, ICON

5 An OC&C Insight Opportunity Knocks MEGATREND #4: EFFICIENCY

A FOCUS ON EFFICIENCY AND CHANGING FUNDING MODELS

As already highlighted, public (and private) Local authorities, municipalities and sector budgets are currently under pressure in equivalent local government organisations are developed markets, forcing education faced with difficult decisions on funding institutions to find operational savings and/or priorities – for example, what services are core cut services. Given the current size of deficits and which ones could be provided privately? and levels of public debt, budgets are The more challenging funding environment expected to remain tight for the foreseeable has also resulted in policy makers considering future in developed countries. For example, in a potential shift to new funding models – i.e., 2010, the UK government announced a 25% user-payer, performance-based funding, and cut in the further education budget (through corporate partnerships. to 2014/15), with further education colleges and other institutions focused on the delivery The pressure to find efficiencies will benefit a of adult education now faced with a much number of players, including ICT and harsher funding environment. outsourcing providers to the education sector; such as SunGard Higher Education and Budget cuts present a number of challenges Embanet Compass Group in the US. There will for education organisations and institutions, also be greater interest from education who are under pressure to cut costs whilst institutions in the use of collaboration and retaining high quality delivery of education. open resource sharing networks to access cost efficiencies.

UK Public Sector Education Expenditure, 2005-11E £bn; % of GDP

130 6.1% 6.5% 6.0% 5.9% 5.8% 120 6.0% 5.4% 5.3% 5.2% 5.3% 110 5.2% 5.1% 5.5% 4.9% 5.0% 100 93.3 92.7 88.6 90.6 89.5 90.5 4.5% 3.4 3.1 90 83.1 3.7 3.3 2.5 Other 78.2 5.4 4.0% 80 73.0 5.0 LA Spend 65.1 69.7 4.5 3.5% 70 4.1 3.2 3.2 59.1 3.0% Pre-Primary 49.7 53.3 55.1 57.4 60.9 63.3 64.9 and Primary 60 2.5% Secondary 2.0% 30 42.1 45.1 47.0 0.8 Tertiary 0.8 0.8 1.5% 0.7 0.8 0.8 0.7 1.1 0.6 0.7 14.3 15.6 17.9 20 11.9 12.6 12.8 12.4 12.7 1.0% 9.9 1.1 10.5 11.3 10 12.9 13.1 0.5% 8.9 9.8 10.0 11.4 11.5 12.0 11.7 11.5 11.3 0 0.0% 2005 2006 2007 2008 2009 2010B 2011E 2012F 2013F 2014F 2015F Source: HM Treasury, www.ukpublicspending.co.uk

An OC&C Insight Opportunity Knocks 6 MEGATREND #5: INTERNATIONALISATION

INTERNATIONALISATION AND STANDARDISATION IN EDUCATION

The growing emerging middle class in many In some markets, namely the UK, the US, language based private education, have developing markets, increasing globalisation Australia and New Zealand, this trend has continued to see rapid growth in enrolments and the dominance of the English language in resulted in the emergence of a new type of at their international schools in and international business continue to contribute education services provider, offering pathway South East Asia respectively. to the growth in international students programmes and English language training. studying in the UK, the US and other English- Companies like Study Group, INTO University Elsewhere, there continues to be strong speaking markets. In higher education in and Cambridge Education Group that partner demand for English language training in particular, students continue to be highly with universities to offer international countries such as China. The potential for mobile, particularly for western and English students help with getting into universities, international expansion into fast growing language education, with the UK and the US have experienced strong growth in revenues. Asian and South American markets creates a preferred destinations. Despite capacity These pathway programme providers also strong investment thesis for many education constraints at some universities, these offer other education services such as companies. For example, in 2010, Pearson international students have generally been sourcing suitable accommodation and (the largest education company globally by welcomed by higher education institutions, as providing ELT courses to ensure international revenues) acquired Wall Street Institute (WSI), foreign students generate higher fees than students attain the required proficiency in which provides premium spoken English domestic students and may require additional English. Larger education groups like Kaplan language training for adults. WSI operates support. For example, in the UK, universities and Navitas have also benefitted (although over 400 learning centres in 26 territories in can currently command tuition fees for the outlook in the UK is now more challenging Asia, Europe, the Middle East and Africa. international students that are up to 4x following the recent overhaul of the student Separately, Pearson reported a 27% growth greater than the tuition fees currently visa system, including tougher entrance in student enrolments at its Wall Street received from domestic and EU students criteria, limits on work entitlements and the English schools in 2010 and announced plans (although this dynamic will change with the closure of the post-study work route). In to open 50 English language centres in China, introduction of higher tuition fees, effective primary and secondary education, private adding to the 66 centres and schools already September 2012). international school groups such as Nord operating under the Wall Street English and Anglia and Cognita, who offer an English Longman English brands.

Non Citizen Enrolment in Tertiary Education – Selected OECD Countries, 2004-07 Thousand Students CAGR +5.8% 1,553 2004-07 1,457 1,387 1,310 340 Other +9.6% 311 280 Spain +12.7% 258 60 46 51 65 New Zealand -2.0% 42 68 126 69 Japan +2.2% 69 126 130 118 244 Australia +7.0% 217 199 211

261 259 Germany -0.2% 260 260

460 UK +8.1% 364 395 418

2004 2005 2006 2007

Source: OECD, UNESCO

7 An OC&C Insight Opportunity Knocks OPPORTUNITIES AND THREATS

The megatrends outlined here present a number of opportunities and also some threats for education companies and potential investors in the education sector, some of which are outlined below.

Opportunities Threats DECENTRALISATION l New operators of independent l Suppliers to educational institutions AND MARKET-BASED schools can explore scale and such as the publishers of text books REFORMS experience benefits in primary and face a more fragmented buying secondary education environment, with implications for how they manage their sales force l For-profit private school groups can and other channels to market target new growth opportunities (eg, operating Academies) if restrictions on generating an economic return are lifted (in the UK) GROWING l Private operators of schools and l In developed markets, where the PARTICIPATION universities can target new growth disposable income of middle class opportunities in emerging markets consumers has been adversely impacted by the recession, private schools may experience lower enrolments GROWING TECHNOLOGY l Providers of ICT products and l Publishers of traditional print-based INFRASTRUCTURE services, such as interactive white textbooks need to invest in digital boards, mobile devices and propositions to offset the threat of educational software can leverage start-ups and other market entrants growth opportunities in markets investing further in ICT

l Innovators in digital content and resources can similarly benefit A FOCUS ON EFFICIENCY l ICT and outsourced services providers l Universities in the UK not offering AND CHANGING can benefit from increased demand ‘value for money’ to students FUNDING MODELS (IN for their services following the advent of higher tuition DEVELOPED MARKETS) fees, may experience a fall in l Providers of collaboration and open enrolments resource sharing networks can similarly benefit INTERNATIONALISATION l Pathway programme providers will l Universities and other higher AND STANDARDISATION see increased demand from education institutions in the UK will universities in the UK, given the experience a decline in enrolments recent overhaul of student visas from international students given the tougher student visa regulations l Providers of ELT courses can benefit from the continuing demand for English language training

l Private international school groups can leverage increased demand in overseas markets

An OC&C Insight Opportunity Knocks 8 SO WHAT?

The megatrends identified pose some tough questions for any company in the education sector, including education institutions, technology and digital companies, providers of support services, traditional textbook publishers and other suppliers. Each megatrend poses some pertinent questions, which OC&C has worked with clients to address:

1. DECENTRALISATION AND MARKET BASED REFORMS

l To what extent will schools independent from Local Authority or equivalent local government control deliver improved academic outcomes?

l Will new, scale operators of independent schools emerge and if so, what opportunities will these groups present for investors, given the current restrictions on profit making in England?

l As more power is devolved to schools, how should suppliers such as text book publishers, reorganise their sales approaches and infrastructure to deal with the more fragmented buying environment?

2. GROWING PARTICIPATION

l Which international markets offer the most attractive growth opportunities for international operators, based on any imbalance in local demand and supply for education?

l To what extent will growing levels of enrolment in tertiary education in emerging markets increase the flow of international students to western markets?

l What scope is there for further growth in the international private schools market? Which cities (and countries) represent the most attractive local markets for new schools?

9 An OC&C Insight Opportunity Knocks 3. GROWING TECHNOLOGY INFRASTRUCTURE

l Given the increases in tuition fees in higher education in the UK, will universities need to offer lower cost delivery models, such as online or hybrid degrees?

l Which international markets offer the most attractive opportunities for providers of Learning Platforms and other education technology infrastructure?

l How can technology be used to improve access to numeracy, literacy and other adult skills training for the growing number of young adults in the UK not in employment, education or training?

4.A FOCUS ON EFFICIENCY AND CHANGING FUNDING MODELS (IN DEVELOPED MARKETS)

l To what extent are there opportunities for higher education institutions to explore further opportunities in shared services, particularly in the middle and back office?

l Will the UK see the emergence of new outsourced services providers such as SunGard Higher Education and Embanet Compass Group in the US?

l To what extent will UK universities need to adopt more sophisticated consumer (student) segmentation and pricing, given the advent of higher tuition fees in September 2012?

5. INTERNATIONALISATION AND STANDARDISATION

l Does the ELT sector offer opportunities for consolidation?

l Which international cities and markets offer the most attractive growth opportunities for operators of international private schools?

l What is the expected growth in international curricula such as the International Baccalaureate and what opportunities will this growth present for suppliers to schools?

It is an exciting time to be involved in the education sector, with opportunities to gain competitive advantage. We would love to hear about the challenges your company is facing and share views on the future. Please get in touch on [email protected]

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