First investor distributions 6.4% higher than projections
60 million students graduate high school every year, top of their class, but unable to pursue higher education and reach their full potential. 4 years ago we started supporting the first small cohort of students in Ghana with the goal of proving that an investment model has the potential to break down these financial barriers to higher education.
Over these last 4 years we have supported 4 cohorts of increasing size. Today, 221 students are in different stages of the program and outperform our initial projections. 221 students that, instead of street vendors or subsistence farmers, will become future leaders in science, engineering, medicine and business. These 221 students show that an investment model can indeed accomplish our mission of equitable access to tertiary education and create value for both students and investors.
We would not have been able to support these students without our backers. The 2015 cohort was funded by a crowdfunding campaign, the 2016 cohort was the first cohort funded by investors. Because the first students in this 2016 cohort have graduated and started making repayments, we are proud to be able to provide our investors with their first payout. We’re even more proud that these distributions, based on the better than projected performance of our students, is 6.4% higher than our latest conservative projections. Projections that had already been revised upwards from a 9% to a 10.1% ROI. These results show that our model works:
1. Student cohorts
We don’t underwrite loans based on a credit score, instead we invest in students based on early predictors for academic and career success as well as character traits that improve likelihood of repaying. We only support degree programs that are in high demand in Ghana and offer graduates great career prospects. This ensures that our program creates value for students and investors alike. Across our cohorts, 12% of students pursues a business related degree (accounting, finance, etc.), 29% an engineering degree, 12% an IT degree and 47% a science degree (mostly applied science).
Women are often even more affected by financial barriers to higher education than men are. If a family has the financial means to support one student, it is often the son and not a daughter that gets to study. Women are also less likely to complete high school, and if they do graduate they often have lower grades due to all kinds of social and financial difficulty they had to overcome to get there. Even if women do get a degree, they are less likely to pick the high earning engineering, science, finance and IT degrees we support at Brighter Investment. We’re very grateful to the DKM Foundation for the grant we received from them together with our NGO partner World University Services of Canada (WUSC). This grant will help us identify what Brighter Investment can do to improve access for women, without compromising the for profit business model. As of our next update we’ll start reporting on progress in this area as well.
We are also investigating career potential for graduates with education, health, and maritime degrees as well as shorter coding courses. We have identified the programs that are interesting investments for us, and have started to sign agreements with schools in these fields to start supporting their students. Expect these fields to be included in the next investor report.
2. Salary developments
Our investment approach is very data driven. Every year we work with our education partners to send our career questionnaire to thousands of their alumni. We ask these alumni where they work, how much they earn, how long it has taken them to find employment etc. The results of this research are used to determine what degrees to support and what the terms of our sponsorship agreements should be. The graph below shows how average graduate earnings have developed since our first questionnaire in July 2014:
Science and engineering graduates saw another marked increase in average earnings this year. This increase is apparent across the board of engineering and applied science degrees. Graduates with a degree in minerals engineering saw the largest growth over the last year. These findings are unsurprising as the mining crisis is really over in Ghana, and a number of mines have (re-)opened where also some of our students have found employment.
Over the last year earnings from business related degrees didn’t keep up with inflation or the USD/GHS exchange rate. Since our first salary research in July 2014, business graduates on average have barely increased their earnings when converted to USD. However, our data shows a clear divide between actual business degrees and business related degrees like accounting, law, actuary etc. These last types of more specialised degrees saw an increase in earnings, also adjusted for inflation. Because these specialised degrees were already the higher earners, these are the degrees we actually support. Even though there are really high quality business degree programs that provide their students with a lot of value, like MBA degrees at the top Ghanaian universities, there are also many bad ‘business schools’ in Ghana that don’t create value for their students. These lower the average earnings by business graduates in Ghana.
As education providers struggle with financial dropouts and unpaid tuition bills, they want us to provide financial support to their students. Our data, and focus on programs that provide value to students, incentivize education providers to improve the job relevance of their programs.
3. Investment performance
Many variables go into the model that we use to project investor returns. The most important of these variables are:
Unemployment: Unemployment for our graduates is back down to 5%, but last fall was as high as 15%. We’ll always have unemployment figures higher in the fall from graduates that haven’t found a job yet, and this figure goes down over the course of the year when these students do secure employment. However, on average it took our graduates longer to find a job than expected. We’ve investigated the cause and found that students underestimate the effort and time required to find a job, start looking too late and can be too passive in the job search. We’ve made changes, and will continue to make changes to our mentorship program to improve the performance of our students. Based on these improvements, we expect next cohorts to do better.
Dropouts: Unfortunately we did have the first student, part of your 2018 cohort, leave our program before graduating. However, this student did not dropout of university: He received a scholarship to study medicine in Cuba and took advantage of that opportunity. The student had only started his chemistry degree this year, and over the course of the next few years will, together with his guarantor, repay the amount he owes Brighter Investment per his contract. To put our dropout rates in perspective, dropout rates at our partners is 6% on average.
Defaults: To be conservative, our projections have always been based on 15% of students that we support for a degree to not repay what they owe. Students are occasionally late with payments, and we’ve had to fix collection problems, but no students have stopped repaying to date.
Salary levels: Our graduates have increased their income 5X on average with their degrees, and earn 3% more on average than what we projected. We’ll continue to base our projections on what we expect average graduates to earn, and not what we expect our significantly more talented Brighter Investment graduates to earn.
2016 investor cash flow projections: The graph below depicts the projected cash flow for investors invested in our 2016 cohort. Both the most recent projection, updated based on the recorded performance to-date, and the original 2016 projection are depicted. The ever so slightly lower projected distributions this current 2018 academic year stem from the aforementioned students that took longer to find employment than anticipated. The higher cash flow projections for 2019-2022 are the result of the across the board better than projected performance of our students as described above. Projected investor distributions have increased less for 2023-2027, because better than projected performance also means that students are faster to complete their repayment period, reducing the number of repaying students and thus distributions in later years. As described in the introduction, the first semester of the 2018 academic year has been completed and resulted in 6.4% higher repayments and distributions than this projection suggested.
2017 & 2018 investor cash flow projections: Based on the described better than projected performance, distributions for the 2017 and 2018 cohorts have also been positively revised. And if students continue to outperform projections, as they did this last semester by 6.4%, returns will be revised upwards again in the future.
Our initial projections were based on real life earnings by thousands of alumni at our partner universities as well as 20 years of labor market statistics and economic data. Our projections were also conservatively based on average students even though we only select the brightest students for our program. That’s why the fact that our students outperform our projections didn’t come as a large surprise. We know that the characteristics of this new asset class (low volatility, attractive return, hedged against inflation and fx risk, measurable impact and predictable semiannual distributions) are attractive for institutional investors. Our goal for the next years is to reach the scale in multiple markets and build a good enough track record that allows us to attract institutional capital. After all, it is these supertankers of global finance that have the capacity to really put a dent in this $600 bln USD unserved market.
Together with our NGO partner WUSC, who has offices and higher education relations in almost every attractive developing country, we’ll have all the building blocks in place for rapid expansion fueled by institutional investments after 2021. But we need your help to get there. If you’re interested in learning more about investing in our students or company, please contact us for more information at email@example.com. The future is bright. Be part of it.