When It Comes to K-12 Education, Where Are the Impact Investors?
Everyone agrees that education is important to a well-functioning society and a prosperous economy – a reality that has been thrown into sharp relief by COVID-19. But as families and teachers across the country struggle to decide how (and whether) to return to school this year amidst the ongoing pandemic, the longer-term focus on the quality of education is taking a back seat.
For decades, we have been hearing reports about how schools in America are lagging behind other countries in key areas – particularly in lower-income communities. Why can’t we figure out how to raise the necessary funding and implement the right programs to achieve better results?
A Sector in Need of Impact Investment
What is needed is not just more funding for education, but a better system for generating positive student outcomes – whether that’s defined as better test scores, higher graduation rates, higher college matriculation rates or increased job opportunities.
Aligning financial investments with social, environmental and economic outcomes is the main objective of impact investors. Yet impact investors have yet to contribute meaningfully to the funding of primary and secondary education systems. While impact investors have become comfortable financing edtech, their work in the education sector at large remains relatively scant.
According to the Global Impact Investing Network’s 2020 survey, only around $1.26 billion worth of impact investments were made into the global education sector in 2019, which ranked 12th out of the 13 tracked investment categories (energy and financial services ranked first and second). This is actually down 7% from 2015, when nearly $1.7 billion was invested into education by impact investors. While most impact investors said they planned to either increase (48%) or maintain (41%) their allocations to education over the next five years, it is clear that there are some structural or market barriers holding them back. This is in contrast to philanthropic supporters, which according to the Giving USA 2020 report, made education-related organizations their second-biggest target of funding (after religious organizations).
Few will disagree with the benefits of an educated country – it’s a key tenet of democracy, a cornerstone of a thriving economy and, for many, a first step to breaking free of intergenerational poverty. Realizing these benefits will require additional funding from both public and private sources. However, while last year’s federal stimulus packages provided some temporary relief to schools, the reality is that many states and municipalities are under increasing budget pressure each year, and are not in a position to significantly step up their education spending. Therefore, the vision of a better-educated citizenry will likely remain out of reach unless we can find a way to remove the barriers preventing impact investors from using their capital to help reimagine our broken educational system.
What’s Stopping Impact Investors from Allocating to Education?
One reason for investors’ reluctance to add education to their portfolios might be that K-12 schooling is largely seen as the purview of government, which historically has been true. The vast majority of Americans went to a public school, but few outside of school boards or city councils have had to think about how these schools get their funding. In fact, almost all of it comes from the government: In 2018, according to the U.S. Census Bureau, state, local and federal governments provided over $720 billion to fund the public K-12 system, which may seem to leave little space, or need, for the involvement of private investors. In addition, some investors may also doubt it’s their place to try to improve education, a notoriously complex behemoth of a system that is rife with opportunities for good intentions to go wrong.
Another issue is that it may not be immediately clear to impact investors – both individuals and institutional investors alike – how to invest in K-12 education. While it’s straightforward to write a check to your local PTA, it’s less obvious how investors can make an impact investment in K-12 schooling, outside of buying a municipal bond.
Fortunately, impact investors can look to other sectors for potential solutions to both of these obstacles. For instance, while K-12 education funding from the philanthropic sector is less than 10% of the amount coming through government spending, it has had an outsized impact on the key discussions that have shaped education policy and trends over the past two decades. For example, philanthropy sparked the growth of charter schools, and has led to a national dialogue about school choice. Philanthropy also provided seed funding for new technology solutions, such as Khan Academy, which is now a global leader in virtual education. Impact investors, with their vastly larger supplies of capital, can build on philanthropic efforts to advance these innovative approaches and help reshape the K-12 system.
COVID-19: An Opportunity for Greater Investor Involvement
The list of K-12 schools in need is growing larger by the day, as the dual health and economic crises sparked by COVID-19 ravage countless communities that were already being left behind.
Interestingly, the pandemic might present investors with an opportunity to overcome the obstacles discussed above, and to reimagine their engagement with public education. For instance, with schools across the country scrambling for funding to both physically spread out their students and provide effective online classes amidst the pandemic, impact investors may be able to help fund the facilities and infrastructure required to maintain a safe learning environment. This could provide a unique gateway to greater investor involvement even after the pandemic has ended.
To help fund the opening of new schools, impact investors can lend capital for school construction and renovations, especially for public charter schools and private schools that lack access to public funding. Such an investment has the potential to generate safe and reliable single-digit returns for investors, similar to the risk-return profile of investing in a municipal bond for district schools. It can also save these schools money, as they are currently paying much more than they should for capital from traditional Wall Street investors (like banks). And by sourcing cheaper capital from impact investors, they can spend more money in the classroom. This type of impact investment could have a direct impact on the quality, accessibility and affordability of education for communities in need.
Non-district schools, such as private schools and charter schools, can offer additional opportunities to investors. Like their district counterparts, these schools also issue debt – but they often pay a much higher interest rate than large school districts. (This is because non-district schools are not government entities that can raise taxes if they ever need more money to pay back the bonds.) These types of investments present an opportunity for impact investors seeking to help level the playing field for these schools, which receive less funding per-pupil than traditional public schools – and which, according to some studies, often produce better educational results for the most at-risk students.
There is clearly a need to reimagine the education sector through increased funding and better outcomes. The challenge is identifying the right opportunities and, at least for impact investors, providing confidence that an investment will generate the desired social outcomes. To that end, investors can benefit from schools’ expanding efforts to track and collect relevant data points about their students, which can be fed to impact investors to help show tangible successes – and also identify areas for improvement. The growing popularity of social impact bonds, in which an investment’s outcomes can be verified by an independent third-party, can provide investors with an added degree of confidence that their capital is being put to good use.
It’s clear that governments and philanthropies are not up to the task of reimagining our educational system on their own. The private sector, led by impact investors, can and must play a bigger role. As the education sector works to navigate and recover from the tumultuous events of the past year, now is the time for investors to act.
Mark Medema is the Managing Director for the Charter School Facility Center at the National Alliance for Public Charter Schools. For more information about impact investing in public charter schools, please visit www.impact4ed.org.
Photo courtesy of CDC.
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