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  • Emerging Markets Equity

    Private Education is Growing in Emerging Markets

    February 23, 2017

    An Exciting Investment Opportunity

    Given its rapid growth, private education in emerging markets countries provides what we believe is an exciting investment opportunity. The industry is being energized by the twin growth engines of expanding middle classes and rising populations: 90% of future global population expansion is expected to come from emerging markets countries.1 Today, 82% of students are from emerging markets countries, according to research from BofA Merrill Lynch.2

    Economic Growth Propels Rising Education Standards

    Private education may be a small sector in emerging markets but it is growing rapidly. Economies of emerging markets countries are developing quickly and their middle classes are expanding. With this comes the desire of parents to provide children with the best possible educational opportunities. But the quality of public education varies greatly across the emerging markets universe. Many countries in Africa are positioned toward the low end of this spectrum;3 South Africa is a good example, and we explore its situation below. In addition, there is growing demand for after-school education, tutoring, and test preparation, particularly among Asian countries. As a result, the demand for private education companies continues to grow, in size, importance, and number.

    A Case Study: South Africa

    Primary and Secondary Education

    South Africa is a compelling emerging markets case study. Compared to other emerging markets, South Africa spends a significant amount on education (6% of GDP), yet public education outcomes are poor. (By contrast, Russia, China, and India spend about 4% of GDP; by comparison, the U.S. spends 5%).4 In recent years, South Africa's pupil-to-teacher ratio has risen and pass rates have worsened. Yet public primary and secondary schools in South Africa still educate 96% of all pupils.5 Private education companies account for the remaining 4%, and have yearly been ramping up the construction and expansion of schools. While the number of students enrolled in South African private schools has grown from 366,000 in 2008 to 566,000 in 2015 (a 55% increase),6 it is still far outweighed by the more than 12 million pupils enrolled in public schools.7 But the need is extreme, given that South Africa ranked 138 out of 140 on the quality of it education system as shown in the table below.

    South African Private School Enrollment is on the Rise


    Source: Curro Holdings. 

    South Africa's Education System Scores on the Low End of Quality

    Quality of Education
    Country Rank out of 140
    Switzerland 1
    U.S. 18
    Kenya 36
    Zimbabwe 42
    India 43
    China 56
    Russia 82
    Mexico 117
    Nigeria 125
    Brazil 132
    South Africa 138
    Source: World Economic Forum (2015-16).

    South African private schools are able to attract good teachers, provide top quality facilities and materials, and their education outcomes are far higher than those in public schools. Given the obvious need for private education in South Africa, we have spent the last several years extensively researching the two publicly listed education companies in South Africa: Curro Holdings8 and ADvTECH Limited.9 Historically, the schools of both companies catered to the higher income segment of the population. Recently, Curro has developed a more affordable private school option that still delivers excellent academics, but has slightly larger class sizes and fewer extracurricular and sports activities that drive up tuition costs. The result is that private education is increasingly becoming an option for middle class households, as Curro schools' tuition fees range from ZAR12,000 per annum to over ZAR84,000 per annum.10 Curro has ambitious expansion targets, including increasing its student enrollments by roughly 20% per annum through 2020.11 ADvTECH is also expanding its school capacity.12

    Tertiary Education

    Tertiary education in South Africa also affords an opportunity to private education companies. Currently, all universities in South Africa are public and, with the number of students increasing, they have neither the money nor capacity to cope. As a result, a number of private colleges have sprung up that offer accredited degree programs. These have been growing in popularity. ADvTECH is the leader in this area, owning a number of colleges and also having significant expansion plans.13

    South Africa Offers a Tertiary Education Opportunity
    % of 25-65 Year Olds with Tertiary Education


    Source: OECD, BofA Merrill Lynch. Data as of 2015. 

    China and Brazil in Brief

    What South Africa demonstrates is that private sector education companies can increasingly offer solutions that governments either do not have the money or the ability to provide. We see a growing role for private education across many emerging markets countries. In China, for example, there are numerous publicly listed education companies that offer tutoring services, distance education, test preparation, and private schooling. One trend in China is the increasing number of internationally accredited schools. One listed company, China Maple Leaf Educational Systems14 operates schools based on the Canadian province of British Columbia's education system, and its high schools are certified by British Columbia. Brazil also has several publicly listed education companies. Like these, we expect many more education companies to form, grow, and eventually list on stock exchanges across the emerging markets.

    Private Education is a Growing Emerging Markets Trend

    The trend of growing middle classes in emerging markets countries is here to stay. In addition, they have generally young populations and favorable demographics. According to Euromonitor, private education spending is expected to grow by 4% per annum worldwide, and in fast-growing markets like China and India, growth is expected to exceed 6% per annum.15 These trends show that the size and importance of private education industry is expected to grow for years to come, and is ripe for potential investment opportunity.

    For a complete listing of the holdings in VanEck Emerging Markets Fund (GBFAX) as of 1/31/16, please click on this PDF. Please note that these are not recommendations to buy or sell any security.