Public charter schools are a growing phenomenon in public education and now teach 3.2 million students in the United States. But they often face shortfalls when trying to fund their capital costs.
And that presents an investment opportunity, especially for those who want their money to have impact, says Mark Medema, a managing director at the National Alliance for Public Charter Schools.
Charter schools receive government funding for programs, just as traditional public schools do. But unlike traditional schools, they must also raise their own money for capital expenses. That is where impact investments come in, Medema told Financial Advisor.
Nearly 7,000 charter schools have been established in 42 states and the District of Columbia. The schools receive $440 million in public funds for programming. However, it is estimated nearly 1 million children are waiting to get in, Medema said.
The Walton family, of Walmart fame, recently invested $100 million in charter schools, but many potential investors and donors do not think of these schools when considering impact investments or outright grants, Medema said.
Public charter schools issue debt when they are established to pay for capital costs. The schools seek socially motivated individuals or foundations to buy bonds or to underwrite loans.
“The loans are relatively secure and stable, as long as the investor selects a good charter school,” Medema said. Intermediary groups exist to help the investor select good schools. Investors can anticipate repayment with about a 3% return on three- and five-year notes, or about 100 basis points above the five-year Treasury note rate, he said.
The extra funding can bring down the cost of a charter school’s repayment interest. “If you are lowering the cost of borrowing for the school by 1% or 2%, that is a huge savings,” he added. The default rate for charter school loans is approximately 1%.
Each charter school is unique. Many serve students from low-income areas, and many focus on a particular educational area, such as arts or technology.
“The problem is no one is talking about the need for funding,” Medema said. “It takes an extra effort by a financial advisor or an investor to uncover this opportunity.”