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Farrer & Co | International Schools series - Part 2: Emerging themes, trends and approaches

In the previous edition of the School Report we gave you the first instalment of an article written by Paul Jones and David Copping on the theme of international expansion. They looked at the question of why there seems resurgent interest in heading overseas and, in this next instalment, they start to look at some of the emerging themes, trends and approaches we have seen in relation to those that are embarking on it.

We have been advising UK schools on their overseas initiatives for approaching 10 years now and in that time not only have we built up a wealth of experience of these deals - and just how varied they can be depending on the parties involved and the territories in question - but can also bear witness to some definite trends and emerging themes. We begin by looking at some of the observations we would make in terms of the market generally and the wider context within which schools are making the decision whether to head overseas.

Track the middle-classes

The local middle-class populations have proven good indicators of territories (and regions within them) where demand for premium education has shown steady growth and where some of the most successful UK school exports have tended to be based. Arguably, some of those markets have become quite saturated - the Gulf region might be the best example - and so it is those with a growing middle-class population where future opportunities may lie. Africa, for instance, may now prove a better longer-term prospect than India based on its faster growing middle-class population; Vietnam too, especially with the imminent relaxation of local regulations.

Supply and demand

Hinted at in the point above, and in light of the headline figures referred to previously, there are some basic economics that ought not to be overlooked. Some markets are becoming quite heavily saturated in terms of premium bi-lingual/international education provision, and UK schools must really test the local partner's business model to see if the demand will bear out the mid to longer-term projections. Being clear about your own 'price-point' will either open up or close off certain opportunities, but that will be no bad thing in terms of retaining focus and finding the most suitable local partners/investors. As has been mentioned, the Gulf region has certainly seen a slow-down of activity as the premium-end of the market has become quite saturated, although one positive effect of this is that the market is reasonably well-established, local regulations have bedded-down and local investors/partners are fewer in number and more experienced, which can make the job of navigating new opportunities in that region much easier. It is also opening up new opportunities for a 'less-premium' offering.

All that glitters

Contrast that with China, which is undoubtedly still experiencing high levels of demand at all levels, especially at the premium end. Witness therefore the inevitable rush to be there - both from the UK schools and from potential investors, some of which are rushing there seeking to exploit the opportunity themselves without really knowing what they are doing. Add to that the developing regulatory landscape, from the country-wide level right down to the regulations of the local province or city, and there is little doubt that the 'unknown' dimension makes establishing a successful overseas presence in China more difficult. Indeed, when it comes to regulation in China we are still bearing witness to the Ministry of Education's efforts to tighten the regulation of private education generally and in particular around the provision of education to compulsory school-age children (grades 1-9; ie ages 6 to 15). 2017 saw the implementation of a ban on for-profit private schools providing education to this age-group (although kindergarten, senior secondary and higher education were unaffected by this); and more recently we have seen two further developments pursuing a similar agenda. First, a consultation on the draft Implementing Regulations of the Law of the People's Republic of China on the Promotion of Private Education - as its title suggests - is proposing to ban: (a) the use of so-called VIE structures to close a loophole that was being exploited to get round the restriction on the foreign control of private schools providing compulsory-age education; and (b) "education groups" (unhelpfully not defined in the draft legislation) assuming control of not-for-profit private schools through some form of intra-group transaction or arrangement. If adopted, these restrictions will definitely impact the structuring options for owning, controlling and running non-state schools in China. And second, the Ministry has recently mandated inspections of all textbooks used to teach compulsory school-age children, in whatever schools are teaching them (including international schools), with the specific aim of removing "foreign teaching materials that have replaced national curricula"; mainly, it is suspected, from schools offering international and/or bi-lingual curriculums.

So be under no illusion therefore that the very attractive returns being promised in China may come at quite a price for the UK school in terms of time and resource commitment. These opportunities really must be worked at; there must be a proper appreciation of the local regulations to understand whether the project is or can be a viable one for the UK school; and above all the "effort vs. return" equation cannot be under-estimated.

Brand

It pays not to forget that for some local partners/investors, the important thing is to have a school that they can brand as "a UK independent school", and that the specific brand of the UK school (its name, logo, get-up, etc) is less important. Sometimes the simple fact that the school is a UK independent school is the attractive force. Indeed, we have become aware of overseas investors looking to establish an overseas brand here in the UK precisely so that it can export it back to the 'home' territory as a 'UK independent school'. Specific UK school brands, bar a notable few, are not as well-known as perhaps many in the UK independent school sector would like to think - it makes some local partners/investors rather opportunistic and short-termist, and their business plans difficult to interrogate. If, on both sides, there are unrealistic views on the value of the brand, or the nature of the demand in the catchment area, that can lead to problems, not least a potential imbalance in the amount of work and effort that the UK school has to put in to keep the project going and to make a success of the overseas school.

Who to choose?

Much has been written about the importance of choosing the right local partner/investor, and many UK schools with successful operations overseas will tell you that much of the success comes down to having chosen the right partner who is receptive to building a constructive relationship that bears the hallmarks of genuine trust, confidence and mutual benefit; and doing that itself requires, at times, intense periods of time, effort and resource. It perhaps is no coincidence that the best relationships seem to be those forged out of a joint overriding desire by both sides for educational excellence, itself borne out of deep-set educationalist ideals. That is not to say that the financial investor, often with connections in a property business, cannot make a good suitor, but it can make the dynamic quite different, and can result in the UK school having to work extra hard not only to establish the school in the local territory but to keep it operating, and to keep the interest of the investor properly engaged. Bearing in mind that whilst there is reputational and financial risk for the UK school, this typically is not as great as the commercial risk being assumed by the local partner. If the partner senses that the UK school is not investing enough into the project, they can be quick to move on and find a means either to exit themselves, or to engineer a situation that leaves the UK school a difficult choice about continuing. It is important to know what the local partner/investor's own drivers are, and ensure there is enough understanding of those in order to ensure a model is adopted for the overseas school that works for both sides. A mis-match can prove fatal.

Due Diligence

And so it proves hugely important to carry out the right type, and amount, of due diligence on any potential partner. This is what schools are increasingly doing, which has been good to witness. It is due diligence not only on the partner entity itself, but the individuals behind the vehicle and what it and their track records are. Much of this can be gleaned from publicly available information, but specialist firms are out there that can delve much deeper and give a clearer picture of who exactly it is that the school is dealing with. And this of course is on top of the due diligence that is needed on the proposed structures, local market and business plans. The results of all due diligence must be kept under periodic review throughout the early stages of the relationship and it can easily take between 6 to 12 months to feel that this has been completed in a way that gets the school - including, importantly, its Governors - into a place where it is comfortable to proceed.

Geopolitical and macroeconomic risks

Finally, UK schools also need to be mindful, especially as part of any due diligence and perhaps as a wider consideration, that we are in a period of increasing geopolitical and economic volatility (at least when compared to the reasonably benign period which followed the bottoming out of the 2008/9 crash). Economic nationalism and trade barriers are on the rise. Any legal structuring and risk assessments must take into account the fact that the arrangements covering cross-border trade can change fairly swiftly, and that currency fluctuations can (if not properly catered for) have a major impact upon revenue streams and/or the economic viability of the venture more generally.

There are good opportunities out there for international expansion, but there is no doubt that as the market has developed the nature of opportunity has changed, and it makes navigating the potential suitors, and indeed the territories where the UK school may want to go, even more of a challenge than perhaps it first was. In the final instalment of this article we will continue our observations of certain trends around the international expansion project, but look more at the deals on the ground and some of the issues schools should be taking into account as they approach them.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, January 2019

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