German education funds a no-brainer
Germany has jumped on the bandwagon of education funds, with pension funds sensing an opportunity for uncorrelated returns above bond yields with an altruistic benefit. On average, a German student wanting to graduate from a private university needs €25-30,000, of which only a small proportion is covered by grants.
"Even when I was studying at the WHU [the Koblenz-based private university specialising in management] many students could not enrol because of the fees," says Marco Vietor who heads Brain Capital, which specialises in education funds. Founded in 2005, Brain Capital was spun off from the WHU and currently manages seven funds co-operating with five universities, one of which is a state college in Lübeck. It is the only firm in Germany offering this type of fund.
The company's advisory board includes Gerhard Klimm, former executive senior vice-president of Landesbank Baden-Württemberg, Hans Wilhelm Korfmacher, managing director of the pension fund for auditors and certified accountants (WPV), Markus Rudolf, professor of finance at the WHU, and Hartmut Leser, CEO of Aberdeen Asset Management Germany.
Korfmacher's €1.5bn fund committed €5m into the education sector several years ago as part of its alternative investment exposure. "For me it is important to offer young people in Germany, whose families do not have the necessary means, the chance to study at a renowned private university. This is a sustainable investment," he says.
"And if it fits our overall asset allocation we will consider increasing our investments into the education sector as it offers a good risk-return profile," Korfmacher adds.
But Vietor stresses that returns do not have to be sacrificed for altruistic reasons when investing in education funds. The expected return on the funds is 6% annually but investors have to commit for the long term.
"If you assume three to four years for studies and take into account that students only have to pay back the loan after they have reached a certain level of income, the holding period of the fund is around 15 years," explains Vietor.
Students not paying back their loans is not really an issue. "University fees are not as high as in the US, where students frequently have trouble paying back loans," Vietor says. Together with the provision that paybacks only have to be made after a certain level of income is reached, this ensures a very low rate of default.
In its risk-return calculations, Brain Capital assumes a 5% default rate on top of average non-performing loan rates and paybacks that fall short of the total, for example because of family planning. "We have a good diversification across 100-120 students in each fund and some of them are earning more than expected," Vietor says. "This levels out the sum of total paybacks, which is important for investors. The rate of default is on average 1%, which is far from the 5% we presume in our calculations."
As an additional safeguard the capital invested by institutional investors in education funds is covered by a capital guarantee from the Landesbank Baden Württemberg, for which part of the invested capital is reserved.
Apart from motives of altruism and a good risk-return profile, Korfmacher also values the very low correlation of education funds with other assets. "As the return of the fund is linked to graduates' salaries it also offers a certain inflation protection," Vietor says. He adds that structural unemployment is not so much of an issue among academics, and that the fund's return only diminishes when graduates receive smaller salaries or reduced bonuses.
Investors, one of which is the €3.4bn Rheinische Versorgungskasse, are committing money to the fund which is only transferred when required.
Currently, Brain Capital manages around €25m, which covers around 500 students. "We have demand for much more from students at co-operating universities, as well as requests from other universities," Vietor says.