Business management consultancy Cairneagle’s Jorge Amírola, Ali Hinds and Robert Dancey examine whether British independent schools can leverage their brands by opening satellite schools around the globe

 

The UK independent school sector is experiencing unprecedented financial headwinds. Analysis by the Independent Schools Council (ISC) suggests that 10,000 fewer children enrolled in independent schools in September last year than in previous years and this may just be the start, with Cairneagle analysis projecting that enrolment across the UK independent school market could drop by between 5.5% and 11% between the academic years 2024 and 2030 due directly to VAT on fees.

Despite the current period undeniably being one of upheaval, the current market conditions (VAT on school fees, loss of business rates relief, employer National Insurance contributions etc) offer a unique opportunity for schools to show agility and adaptability to build themselves sustainable futures that may look somewhat different to the paths they would have expected to follow. Schools are considering a range of different options to ensure their long-term survival, ranging from optimisation of operations to reconfiguration (for example, expanding the phase offering or going co-ed), and from joining a group, to diversification, with the latter sometimes taking the shape of internationalisation.

Diversification through internationalisation

Diversification can lead to greater strength and stability through reducing reliance on traditional fee revenue. It comes in many guises, including opening summer schools, developing an online school and opening/acquiring standalone nurseries, however perhaps the most high-profile option is to expand internationally with the opening of satellite campuses. This is not a new phenomenon; British independent schools have been opening satellite schools abroad since the early 2000s. According to work by the Private Education Policy Forum, there were 30 such institutions around the globe in 2014-15, however this number has since exploded, reaching 122 in 2022-23, with a further 28 planned sites. In 2022-23 the 122 schools were affiliated to 38 British independent schools and this figure was set to rise to 44 if the 28 planned openings went ahead.

Differing approaches to satellite campuses

The majority of British independent schools with satellite campuses abroad have opted to enter into partnership agreements with an investor, often a real estate developer, the vast majority of whom have little to no experience of operating an educational institution. The exact details of these agreements often remain undisclosed and no doubt there is much variation from one to the next, but typically the parent school would receive a single-figure percentage cut of annual revenues (about 3-5%) in exchange for use of the brand, guidance on the running of the new school, and perhaps a handful of visits each year from the senior leadership team of the parent school, although these may be charged at an additional cost.

Some schools have opted for such a partnership model but have chosen an international school group as the operating partner to which they lend their brand, with the partnerships that Cognita has established with Brighton College, Repton and RGS Guildford serving as an example.

Whichever type of partner a school selects, the partnership agreement model requires no capital investment on the part of the parent school. Furthermore, we believe that the brand risk associated with the satellite failing is relatively small, however governing boards are often more cautious and may need to be taken on a journey to reach a point of being comfortable with franchising their school’s brand. To minimise the risk, parent schools can take the prudent approach of ensuring they are able to retract the right to use their brand if any concerns develop over the quality or type of education being offered at their satellites.

Obviously, the revenue generated from partnership agreements varies with factors, including the details of the partnership agreement, the number of pupils enrolled, and the fee structure, but some of the highest-profile British schools are earning up to £500,000 per annum, per satellite school.

Meanwhile, almost no schools have opted to take on a higher level of risk in pursuit of income abroad by making a direct investment and owning the operating company of a satellite campus. Marlborough College Malaysia is one example where this model was pursued. While the initial outlay and associated risk is far more significant, successful projects have the potential to pay for themselves within a few years, with subsequent annual returns an order of magnitude greater than those available through partnership agreements. With numerous examples around the world of partners and developers that have franchised a British school brand and established a successful international school group from the ground up, it may simply be a matter of time until more British schools gain the confidence to take on a higher level of risk by either owning part of the operating company of their satellite schools or even opening and running satellite schools without the support of a partner. However, there’s unlikely to be an explosion of such examples as the schools that are sufficiently well-capitalised to pursue this approach represent a relatively small tranche of the UK market and, linking back to an earlier point, governing boards tend to be risk averse.

The niche for British independent schools

The satellite schools of British independent schools are just a subset of the wider international school market around the globe, one that is characterised by premium and super-premium fees and new build schools. The premium segment of the market is not generally the one that is growing the fastest, so it’s reasonable to question whether there is headroom for the opening of more British-branded satellite schools in this part of the market. We believe that there are two interrelated reasons why this question can be answered in the affirmative. First, the stock of premium international schools in many global cities is ageing, and second, many global cities continue to grow and evolve, with new premium residential neighbourhoods emerging. New premium neighbourhoods create opportunities for new premium schools to serve the families that move there, and these schools are also able to attract families that are underwhelmed by the ageing facilities at the city’s traditional premium offerings.

While we believe there to be headroom for the number of British satellite schools to grow, we believe that now is the time to act as the opportunity could quickly diminish. First, the market conditions in the UK mean that more schools are actively considering their strategic options and it’s possible that the market could get crowded if many settle on an internationalisation strategy as the path to a sustainable future. Second, the large for-profit international school groups are growing and present an ever-increasing level of competition to the British satellite school model. Between them, the likes of Nord Anglia, Inspired Education, International Schools Partnership, Orbital, Cognita and Globeducate own and operate hundreds of schools around the world. While theirs is typically a distinct approach of acquiring schools that they run directly across a wider range of price points than British satellite schools, these groups often target the same markets as the British satellites, and they are increasingly pushing into the new-build market.

For schools that want to push ahead and open one or more satellite schools, we believe there are three key considerations:

Consideration 1 – Where to focus?

For any school looking to begin or expand its ventures abroad, it’s vital that proper time and effort is put into the process of selecting a target location. The attractiveness of different regions as a target for setting up a satellite school can shift over time and there are multiple dimensions to these changes.

Thorough strategy work can help a school properly prioritise which markets to target by considering factors such as size of market, the affordability of the intended price point, the appetite for the intended proposition, the availability of potential locations, the availability of potential partners, and the regulatory environment. It’s important to understand the attractiveness of the above dimensions for the entire country or region under consideration (the Middle East is a region that is currently attracting a lot of focus from British schools), however it’s vital to narrow the focus further to specific cities and even locations within those cities as the above factors can vary significantly across short distances.

Focusing on the last of the above factors, changes to the regulatory environment can be difficult to predict and yet have wide-reaching effects on the success of satellite schools. Much of the boom in British satellite schools over the past decade occurred in China, however there’s now been a shift away, driven by a significant change of attitude from the Chinese government towards outside influence in their education system. Since the turn of the decade, legislation has been introduced requiring Chinese students to study a Chinese curriculum up until the age of 15 and also prohibiting non-Chinese governorship of any school in the country. Alongside the general cooling of political relations between London and Beijing over recent years, this has put an end to the rise of British schools in China. In 2019 we recorded that 80% of schools set to be opened around the world by British schools were in China, however by the beginning of 2023 this figure had fallen to 15%.

 

Consideration 2 – Who to partner with?

It may be true that pursuing an internationalisation strategy doesn’t take a huge amount of resource, but a significant amount of effort may well be required in order to identify the right individuals or organisation with whom to partner. One of the major schools reportedly interviewed around 50 potential partners before embarking on its first satellite school venture. Among other questions, schools must consider whether they want to work with a partner that can cover only a specific city, with a view to procuring other partners for other future ventures, or whether they want a partner that is able to work across an entire country or even region.

Failing to take a comprehensive approach to partner identification could miss the opportunity to foresee that a partner might be likely to fail to deliver the land or the building project as per the agreed plan. Furthermore, some partners may insist on exclusivity in a particular region or country, so schools must ensure that they don’t end up in the position of being unhappy with a partner but legally unable to operate with another in the regions they want to target. Properly investigating the background and capabilities of the individuals and entity into which the school will be entering into an agreement can go a long way to ensuring that valuable time and resource is not wasted.

Consideration 3 – How to assess specific opportunities

Once a school has prioritised the market(s) it wants to target, it will then face the task of deciding whether to pursue individual opportunities that present themselves. In order to validate these opportunities and give the best chance of success, it is advisable that a school undertakes detailed catchment-specific commercial due diligence, and schools should push for the cost of such work to be covered by the partner organisation.

From a market perspective such work can help the school gain a thorough understanding of the demand and competition dynamics that surround an opportunity, whether it be an existing school or a greenfield site. This work is important because, for example, while a market may appear attractive at a national or city-wide level, the potential for success may look very different depending on the specifics of the catchment.

 

Jorge Amírola is a partner, and Ali Hinds and Robert Dancey are managers, at Cairneagle