The mechanics of the fund are counter-intuitive compared to standard grant-making, so let me break down the math behind the $2k and $400 figures and how they relate to the $30k cost.
1. The Recycling vs. The Multiplier Effect I think the confusion here stems from a coincidence of numbers in my previous comment. I mentioned a $5m budget and a $5m leverage target, but those are distinct concepts.
The Recycling Math (p25 Scenario): In this scenario, we start with $1m in philanthropic capital and invest at a gross cost of 30k per student, that sends ~32 students immediately.
Over the next 40 years, as those students repay, the money is lent out again. Each student funds about 1.5 new students every 10 years (ie 150% recovery). In the simulation, that single $1m pot eventually funds a total of 539 students.
This implies a multiplier of roughly 16x: For every 1 student funded by the initial donation, the returns eventually fund ~15 more.
$30k (Gross Cost): This is the “sticker price.” It is the total cash budgeted to send one student (tuition + living stipend + operational overhead) → given our small size stays at this size.
~$2k (Net Philanthropic Cost): This is the unrecovered cost per student in a 40-year period. If $1m of philanthropy eventually educates 539 students (via the recycling described above), the effective cost to the donor per student is $1m / 539 = $1,855.
~$400 (Leveraged Cost): This assumes we achieve the 5:1 leverage ratio. If a donor provides the $1m philanthropic capital and we build a fund with it as first-loss capital, and we raise $5m in commercial debt, the system has $5m to deploy ($1m in reserve). The donor’s “cost per student” drops because their single dollar unlocked five dollars of capacity. → Note, this is quite simplified because we become much more sensitive to assumptions while leveraged. Returns are either much greater or the risk capital is all lost.
2. Financial Viability & Blended Capital You asked: “Something like the real rate of return on $ / euro invested in students has to be equal or greater than the interest rate on the loan?”
Yes, exactly. In nominal terms, the Net Portfolio Yield (after defaults/expenses) must be greater than Weighted Average Cost of Capital (WACC).
In the p25 scenario, the Net Portfolio Yield is 3.8% (Listed under the IRR column).
This is too low to attract pure commercial capital (Even with data, European rates for this risk profile might be 4–7%). However, this is where Blended Finance comes in. We don’t need 100% commercial capital; we can stack different tranches:
Tranche A (Philanthropy/DFI): 33% of the fund. Target return: 0%.
Tranche B (Commercial): 66% of the fund. Target return: ~6%.
Result: The blended Cost of Capital drops to ~4%, which makes the 3.8% return viable (or very close to it).
I have initiated talks with impact funds, DFIs, and banks to structure this. It is difficult to achieve, but within reach, so we hired a CIO. While lenders naturally want years of repayment data, there are creative ways to use philanthropic guarantees to de-risk them early on. We hope to share a more detailed write-up on the structuring of these capital stacks soon!
This is super helpful to have explained and makes more sense now.
So what is your best guess of the cost per student educated given Malengo’s expected ability to recycle costs and leverage? What is the cost per person Malengo educates / facilitates the immigration of that you would put into my BOTEC?
I am comfortable recommending a rule that is internally valid with all our presented assumptions. Our analysis operates in the 25th percentile of outcomes; that implies a cost per student of $1,855. (This lines up with the ~95% cost coverage in your row 39, though that is a happy coincidence!)
However, if you choose to weight across the distribution, here is how the cost per student evolves based on recycling performance and leverage assumptions:
p10: $3,472 (Zero leverage)
p25: $1,855 (Zero leverage)
p50: $353 (Assuming 2:1 leverage)
p75: $377 (Assunming 2:1 leverage; note: more Master’s students in this scenario compensates for lower dropout rates, leading to the flatness here)
p90: $141 (5:1 leverage)
Note: These figures are derived from the distribution in the top comment: $1m / (num_students * leverage).
If you want my personal “best guess”: I believe management will react to the data. If we are able to iterate for a decade, we will push toward p90. The team will find cost reductions using partners and tech, optimize contract specifications to ensure we achieve the target leverage, and refine the underwriting model to find the students most likely to succeed.
So, for your BOTEC, I would put $141 per student (implying ~99.5% effective cost coverage via recycling + leverage). But bear in mind, you are speaking to the person who already made that wager!
The mechanics of the fund are counter-intuitive compared to standard grant-making, so let me break down the math behind the $2k and $400 figures and how they relate to the $30k cost.
1. The Recycling vs. The Multiplier Effect
I think the confusion here stems from a coincidence of numbers in my previous comment. I mentioned a $5m budget and a $5m leverage target, but those are distinct concepts.
The Recycling Math (p25 Scenario): In this scenario, we start with $1m in philanthropic capital and invest at a gross cost of 30k per student, that sends ~32 students immediately.
Over the next 40 years, as those students repay, the money is lent out again. Each student funds about 1.5 new students every 10 years (ie 150% recovery). In the simulation, that single $1m pot eventually funds a total of 539 students.
This implies a multiplier of roughly 16x: For every 1 student funded by the initial donation, the returns eventually fund ~15 more.
$30k (Gross Cost): This is the “sticker price.” It is the total cash budgeted to send one student (tuition + living stipend + operational overhead) → given our small size stays at this size.
~$2k (Net Philanthropic Cost): This is the unrecovered cost per student in a 40-year period. If $1m of philanthropy eventually educates 539 students (via the recycling described above), the effective cost to the donor per student is $1m / 539 = $1,855.
~$400 (Leveraged Cost): This assumes we achieve the 5:1 leverage ratio. If a donor provides the $1m philanthropic capital and we build a fund with it as first-loss capital, and we raise $5m in commercial debt, the system has $5m to deploy ($1m in reserve). The donor’s “cost per student” drops because their single dollar unlocked five dollars of capacity. → Note, this is quite simplified because we become much more sensitive to assumptions while leveraged. Returns are either much greater or the risk capital is all lost.
2. Financial Viability & Blended Capital
You asked: “Something like the real rate of return on $ / euro invested in students has to be equal or greater than the interest rate on the loan?”
Yes, exactly. In nominal terms, the Net Portfolio Yield (after defaults/expenses) must be greater than Weighted Average Cost of Capital (WACC).
In the p25 scenario, the Net Portfolio Yield is 3.8% (Listed under the IRR column).
This is too low to attract pure commercial capital (Even with data, European rates for this risk profile might be 4–7%). However, this is where Blended Finance comes in. We don’t need 100% commercial capital; we can stack different tranches:
Tranche A (Philanthropy/DFI): 33% of the fund. Target return: 0%.
Tranche B (Commercial): 66% of the fund. Target return: ~6%.
Result: The blended Cost of Capital drops to ~4%, which makes the 3.8% return viable (or very close to it).
I have initiated talks with impact funds, DFIs, and banks to structure this. It is difficult to achieve, but within reach, so we hired a CIO. While lenders naturally want years of repayment data, there are creative ways to use philanthropic guarantees to de-risk them early on. We hope to share a more detailed write-up on the structuring of these capital stacks soon!
This is super helpful to have explained and makes more sense now.
So what is your best guess of the cost per student educated given Malengo’s expected ability to recycle costs and leverage? What is the cost per person Malengo educates / facilitates the immigration of that you would put into my BOTEC?
At the risk of being pedantic, the answer depends heavily on your decision rule regarding uncertainty (relevant: Noah Haber’s work on GiveWell’s uncertainty problem).
I am comfortable recommending a rule that is internally valid with all our presented assumptions. Our analysis operates in the 25th percentile of outcomes; that implies a cost per student of $1,855. (This lines up with the ~95% cost coverage in your row 39, though that is a happy coincidence!)
However, if you choose to weight across the distribution, here is how the cost per student evolves based on recycling performance and leverage assumptions:
p10: $3,472 (Zero leverage)
p25: $1,855 (Zero leverage)
p50: $353 (Assuming 2:1 leverage)
p75: $377 (Assunming 2:1 leverage; note: more Master’s students in this scenario compensates for lower dropout rates, leading to the flatness here)
p90: $141 (5:1 leverage)
Note: These figures are derived from the distribution in the top comment: $1m / (num_students * leverage).
If you want my personal “best guess”: I believe management will react to the data. If we are able to iterate for a decade, we will push toward p90. The team will find cost reductions using partners and tech, optimize contract specifications to ensure we achieve the target leverage, and refine the underwriting model to find the students most likely to succeed.
So, for your BOTEC, I would put $141 per student (implying ~99.5% effective cost coverage via recycling + leverage). But bear in mind, you are speaking to the person who already made that wager!
I appreciate the caveat and you sharing your best guess!