Source: Financial Times
by Thomas Hale,
In 2014, Credit Suisse launched its first higher education note. The product promised its wealth management clients social as well as financial returns. Impact investment, the bank explains on its website, “can help underprivileged and talented students from low-income countries get loans for advanced education”.
The notes, part of the Swiss bank’s suite of impact investment products, are based on the lending of Prodigy Finance, a rapidly-expanding company which helps international students pay for MBAs at prestigious business schools around the world.
“We are predicting someone’s earning potential, and we are lending against that prediction,” says Cameron Stevens, chief executive and founder.
Prodigy, which has so far made $750m in loans, is a case study of an emerging relationship between higher education and the global financial industry. It also highlights the ties between universities and corporate recruitment, as well as the push from banks and asset managers to associate themselves with assets that provide a “social benefit”.
The lending process
Prodigy’s initial seed funding came from a competition at INSEAD, in 2006. In its early stages, the company relied on crowdfunding from the alumni network of the French business school, where Mr Stevens studied as an international student for his own MBA.
Last year, by contrast, it obtained $1bn in financing from Deutsche Bank, Goldman Sachs, M&G, Sumitomo Mitsui Banking Corporation and HSBC. It has also, as noted above, established a distribution relationship with Credit Suisse.
Prodigy, emphasising the difficulty students can face when trying to borrow in a foreign country, only makes loans to international students (other companies, like CommonBond, lend domestically in the US). These loans usually pay for an MBA at a major business school, but can also fund graduate degrees in science and engineering. Once living costs are factored in, the cost of such a qualification can often exceed $100,000 a year.
Prodigy, in most cases, caps its lending at 80 per cent of the total cost of attendance. An example, from its website in December, points out that at Columbia Business School in the first year, tuition is $74,400, but the total cost is $110,914. Prodigy would therefore lend up to $88,731.
The investment case specifically relates to the nature of the degrees. One obvious advantage, for the company and its creditors, is that MBAs typically lead to high-paying jobs. MBA track recruitment — where large employers from the worlds of banking, tech and consulting hire directly from elite business schools — includes an additional benefit for lenders. When students are hired, they tend to receive a sign-on bonus which immediately gives them the option of significantly reducing their loan.
Data from Relish, a careers platform, says that three-quarters of candidates they survey now receive signing bonuses, compared to around 60 per cent around 2016. In investment banking, the average signing bonus across its data for an MBA recruitment process is $40,000. Though the signing bonuses from the most competitive US business schools can be much higher, closer to six-figures.
If students receive large signing bonuses, they can use them to pay down a significant portion of their debt straight away. The debt was in turn was used to pay the business school fees, meaning both the student and the lender sit in between a flow of cash, from hiring company to university.
The bonus might therefore be thought as a kind of recruitment fee. This is just a particularly direct example of the student loan funding model in the first place: the idea is that the student funnels cash from future employment into the university. In this respect, part of a students’ salary, via an MBA track, may also imply a recruitment fee, pre-paid to the university.
The MBA model also pre-empts what it happening at universities in the US and the UK, where the pressures of high debt strengthen the need for students to find high-paying jobs, in turn emphasising the role institutions need to play in providing recruitment opportunities for their graduates.
Prodigy is also able to benefit from the existing educational infrastructure. While other new fintech lenders must spend high amounts on marketing to attract borrowers, Prodigy is in a different position. “The universities act as your marketing channel,” says Mr Stevens.
Perhaps the most intriguing aspect of Prodigy’s business model, though, is how it fits into a separate area of marketing: the ongoing boom in impact investing. These investments are often related to the environment, but the movement is increasingly involved in the financing of education (as we pointed out earlier this year in the case of philanthropic subsidies for student loan funding in the US).
Around $350m of Prodigy’s loans have been funded through bonds, which are issued out of a special purpose vehicle in Ireland. Credit Suisse has purchased $165m of these bonds, packaged them into notes, and offered them to its wealth management clients.
Credit Suisse frequently markets this education note as a central example of its role in the impact investing field. Here’s what is says on its website:
In 2014, Credit Suisse launched the first-ever Higher Education Note, in collaboration with Prodigy Finance. Since then, the Higher Education Note has become a continuous product offering, enabling more than 2,500 talented students from underprivileged backgrounds in over 70 countries to access best-in-class universities. This impact investment gives investors access to a diversified portfolio of bonds linked to loans that are awarded to first-class students for the purpose of paying tuition fees for a masters degree at a top university.
(These figures are from a few years ago – the most recent data includes 4,130 students from 115 countries).
MBA degrees typically require a significant amount of initial capital, given the typical maximum loan of 80 per cent of cost (setting aside a few exceptions), and many students are already placed in high-paying careers before entering a course. So when we asked in what way the students were underprivileged, neither Credit Suisse nor Prodigy were able to explain the use of the term.
The likelihood is that education will become further incorporated into the world of impact investing in future. One explanation for that boom in the first place is the anticipation of regulatory or tax incentives. If they do emerge, and the Credit Suisse note qualifies as providing a social benefit, then all of the various kinds of funding that touch on the educational industry will as well. This creates a powerful incentive to direct funding towards it, which might be welcomed by governments looking to curtail their own expenditure.