Investing in bright students amidst Covid-19
The unprecedented Covid-19 crisis means that it is almost impossible to tell what the future will bring. Where we normally rely on historic data to forecast the returns for our investors, it is much less useful under the current circumstances. It is possible that our bright students will need more time to graduate due to prolonged school closures, and some will almost certainly take longer to find a job due to the unfolding economic downturn. But one way or another, our bright students will find their way to success. We’ve used different scenario analyses to paint the picture of what this path may look like for our investors, and we’ll show in this post that your investment will follow a similar trajectory: school closures and increased unemployment may delay distributions, but long term returns remain strong. For more information, please read this letter our CEO sent to all our investors last week regarding Covid-19:
Dear Investor,
I hope this update finds you safe and well. These are uncertain times and this uncertainty is reflected in the performance of investments. Equally so for your investment with us in bright students in Africa. Where normally historic data can help us estimate your future returns, the unprecedented Covid-19 crisis makes it near impossible to predict the future performance of the labor market, and thus how much our students will earn and repay you. To deal with this uncertainty we have modelled various scenarios in this document to show how your investment will perform under different circumstances.
Looking backward, we are happy to report that for the first semester of this 2019-2020 academic year your investment continued to perform as expected. Looking forward, it is good to know that due to the structure of our investment model, even under the most negative scenario based on long school closures, 20% unemployment and no economic recovery in the long run, your investment is expected to provide a 4-7% return. A scenario that is similar in the short term but sees the economy start to recover in 2 years will provide a 6-8% return for investors who’s students will enter the job market during the crisis and 9%+ for investors whose students are currently in school and won’t start looking for a job until Covid-19 has receded.
Like many other businesses, we’ve closed our office and are working from home. In the short term, it is the healthcare and other essential workers that will support us. However, we are acutely aware that once the virus recedes, when schools open up again and economies start to recover, our work will be more important than ever before.
The hardest hit by the economic fallout of this virus will be the people working in the informal economy. Left without an income for months and no social safety net to fall back on, the parents of Africa’s most high potential students will be even less able to afford to pay for their children’s education. Limited access to health care will unfortunately mean that a disproportionate percentage of families will be left without their main source of income forever. It is our job to ensure that these circumstances won’t result in a generation of bright students unable to reach their full potential.
As investors and enablers we may not be able to do anything else at the moment besides staying home, washing our hands and slowing the spread of the virus. But as investors and enablers of human potential, we believe the best impact we can have is by staying focussed. Ensuring that when this is over, economies have their best chance at recovery built on the next generation of doctors, scientists and engineers.
Please don’t hesitate to contact me if you have any questions about the information provided in the following chapters or other aspects of Brighter Investment.
Thank you for investing with us,
Thijs Mathot
CEO - Brighter Investment
1. Investment value
The good news is that despite modelling with significantly increased unemployment, lower wages and long school closures (see chapter 4 for details on how we incorporated the effects of the coronavirus in our projections) projected returns don’t suffer too much. The reason that returns remain stable is due to the way our sponsorship agreement with students is structured: unemployment and longer study durations postpone distributions, but don’t reduce the number of working months that students eventually end up repaying. Lower salaries as a result from the economic fallout of the coronavirus however does affect investor returns. Earlier cohorts that have more graduated students affected by this downturn over the next months and years are more affected than later cohort returns; the first students of the cohort that started their education this year won’t be entering the labor market for another year and a half, and thus are less affected than graduates trying to find a job today.
As there is no marketplace where shares or options of your investment in bright students are frequently traded, there is no market value for your investment. However, as an estimate, we can provide you with the net present value of projected future cash flows discounted by the expected total IRR:
Distributions, projected final annualized ROI and resulting current value for $100,000 investments in every cohort since 2016.
2. Performance of student cohorts
Out of the 389 students we invested in, 298 are studying this year, 91 have graduated out of which 40 are doing a mandatory post graduation internship, 50 are either working or looking for work, 1 has completed the full cycle of support and repaying and is now mentoring new students.
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. And lastly, women that do get a degree are less likely to pick the high earning engineering, science, finance and IT degrees we support at Brighter Investment. That’s why it is extra important that we provide women with equal opportunities to pursue higher education. With the help of our partners, the D. Keith MacDonald Foundation and World University Services Canada, we have increased our female enrollment rate from 10% to 15% for this year’s cohort and continue to work on further increasing that to 20% for the next cohort.
49% of the students are pursuing a science degree (mostly applied sciences), 31% of the students are pursuing an engineering degree, 9% an IT related degree, 8% a business related degree (accounting, finance, business etc.). For the first time in this cohort 3% of students are pursuing an education related degree.
Current study progress for all investor cohorts.
1. After graduating, students perform national service (a mandatory internship).
2. Continuing students from one cohort are also part of the next cohort (i.e. 3rd year students in 2016 are 4th year students in 2017) that’s why horizontally student numbers don’t add up to the presented total.
Various KPI’s are important for the investor return. For the most relevant of these variables we compare the values used for the projections at the time of your investment to the values as observed to date. Based on these results we use conservative estimates to provide you with an updated ROI projection:
Unemployment: We still haven’t cracked the problem of students taking more time than we like to find a job. This means that unemployment fluctuates from 15%, dropping down to 5% over the course of the year when new graduates find jobs. Students continue to underestimate the effort and time required to find a job 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 in this area.
Dropouts: Unfortunately we’ve had the first student dropping out of their program and this student is now making repayments on what had already been invested in their education. A second student left for a good reason, he received a scholarship to study medicine in Cuba and took advantage of that opportunity.
Defaults: This number represents the percentage of students we expect not to repay according to their sponsorship agreement with us. Not because they can’t for lack of an income, because lack of income means they don't have to repay, but because they consciously try to take advantage of the program. Students are occasionally late with payments, and we’ve had to fix collection problems, but no students have stopped repaying to date.
Salary levels: Graduates earn what we expect in local currency, but due to a reduced exchange rate, students earn 4% less in USD than what we projected. This falls within the fx-risk bandwidth we expected and historic data suggests that over time this is more likely to converge again than diverge. Our graduates have increased their income 5X on average with their degrees when compared to their peers without a degree.
3. Cash flow projections
The unfortunate truth is that when going through unprecedented circumstances like we are experiencing today, historic data becomes much less useful for predicting the future. The confidence interval we normally provide you with based on historic fluctuations of salary/exchange rate/unemployment etc. doesn’t make sense at this time. To at least give you an idea of how your investment can be expected to perform, we ran a number of different what-if scenarios. Hopefully, by the time we write our next update in the fall, the worst of the covid-19 crisis is over and we have a better idea where the global economy stands.
Negative scenario - This scenario is based on a severe economic crash without a real recovery. Among other things, it assumes unemployment among graduates shooting up to 20% and staying there for the duration of the investment period. Wages drop by 10% and don’t recover. Compare this to the 2008 financial crisis that resulted in a reduction in wage GROWTH from +8.4% to +2.8% in developing countries and a recovery in subsequent years, for this negative scenario we are assuming that to go to -10% and not recover.
Medium scenario - This scenario is based on an economic downturn and recovery after 3 years. Under this scenario, unemployment goes to 20% but recovers to 10%. Wages drop by 5% from their current level but recover as well. Default rates are assumed to be 10%. Based on the Economist’s opinion that economies will recover if the crisis is handled well by our politicians, this is the scenario we are aiming for.
Impact of study delays - This third scenario is the same as the second scenario, but shows what would happen if school closures result in a full lost semester of education. This scenario would materialize if students can’t go back to class yet in September or October. According to our education partners they are doing everything they can to prevent this from happening, including elearning options and staged starts of the academic year allowing students to spread out in labs and classrooms. But who knows what is possible or not possible come September.
For these three scenarios, the cash flows we project for $100,000 investments in every cohort are as follows:
Paid and projected distributions for an investor that has invested $100,000 in every student cohort since the 2016-2017 academic year.
Conclusion 1, distributions pushed out, but overall return less affected - What you see in all three scenarios, is that in the near future distributions are significantly lower. Lower wages, more time needed for graduates to find jobs and higher unemployment all reduce student income and thus repayments. However, two out of these three don’t impact the investor return: our agreement with students states that only months of full time employment count towards the repayment period, and months of unemployment actually increase the repayment period by 0.25 months. The resulting return for the very bleak negative scenario is still 5.3%, 3.7%, 5.8%, 7.9% annualized for the 2016/2017, 2017/2018, 2018/2019, and 2019/2020 investors respectively.
Conclusion 2, university closures reduce distributions in near term, but not ROI - Just like there is a mechanic in the student sponsorship agreement for unemployment that puts the responsibility of finding a job on the student, and limits the impact of unemployment on your ROI, also a delay in graduation has a similar ROI neutral mechanic. Longer study durations result in slightly longer repayment periods and thus maintain the same ROI for investors. Distributions in the near future are reduced in the rightmost graph, as students are still studying in the next years instead of working. However, longer repayment periods mean that in the later years, more students are still repaying and thus distributions are higher than they would have been without the university closures. Returns for the different investor cohorts under the scenario with university closures are 8.1%, 6.6%, 8.6%, and 9.9% respectively.
Conclusion 3, 2019-2020 cohort least affected, 2017-2018 cohort most - As has become clear from the numbers so far, returns for investors invested in the 2019-2020 cohort are least affected by this crisis. The reason is that the first students in this cohort won’t be joining the labor market until the fall of 2021. By this time, the economy has started to recover under the medium scenario. As explained above, we expect (and to be honest, hope) this scenario to be closest to reality in which case returns will be 6.9%, 5.7%, 8.0%, and 9.9% for the 2016/2017, 2017/2018, 2018/2019, and 2019/2020 investors respectively. The 2017/2018 investors will unfortunately be most affected by this pandemic, because so are the careers of the students they invested in.
4. Final remark
Unfortunately it is impossible to tell what the future will bring and historic data can’t guide us under the current unprecedented circumstances. The one thing we do know is that one way or another our bright students will find a way to build a successful career, they may just need a little more time. Our scenario analyses presented in this post show that your investment will follow a similar trajectory: school closures and increased unemployment may delay distributions, but long term returns remain strong. Together we will ensure that, after the virus recedes, the bright students whose families will be hit hardest by this crisis still have a bright future to look forward to!
