Marriage of Convenience: Behind the Alliance of Hedge Funds and Charter Schools

What’s the best way to strike at a teacher’s union?

Fund a charter school.

At least that’s the tactic Daniel Loeb, CEO of the hedge fund Third Point LLC, has employed in his ongoing feud with the American Federation of Teachers and its president Randi Weingarten. Since it’s rare for hedge funders to link their support for charters so explicitly to union opposition, the episode makes for a rare glimpse into the minds of the charter-smitten investor class. 

As Bloomberg has it,

Loeb, who manages $13.6 billion, had fellow hedge-fund chiefs Paul Tudor Jones, David Tepper and Paul Singer applauding in the ballroom of Manhattan’s Mandarin Oriental Hotel last month as he donated an extra $1 million to a group of charter schools to show his opposition to the head of the second-biggest U.S. teachers union.

In April, the union included the four billionaires on its “watch list” of money managers that support groups the labor organization said are hostile to traditional public pensions. The groups included StudentsFirst, an organization that backs eliminating tenure and funding charter schools at the same level as public ones.

“Some of you in this room have come under attack for supporting charter-school education reform and freedom in general,” Loeb told the audience. To show opposition to Weingarten, the “leader of this attack,” Loeb, 51, boosted his pledge to the nonprofit Success Academy Charter Schools in New York City, where he’s a director, to $3 million from $2 million.

His audacity here is deflated only slightly by the fact that he’d just backed out of a conference for fear of facing aggrieved teachers.

Of course “supporting charter-school education reform and freedom in general” isn’t what the AFT opposed in publishing the list. According to the AFT, “Some asset managers have directly backed initiatives that harm the retirement security of plan participants, to whom trustees have a fiduciary duty.” Essentially, the list aims to steer unions from investing their pensions with firms whose politics endanger those very pensions.

In the eyes of the AFT, Michelle Rhee’s reform organization StudentsFirst is the chief culprit among the list’s nonprofits. StudentsFirst supports altering the defined-benefit program. Loeb happens to be a “co-founder” of StudentsFirst, and he sits on the board of its New York chapter. 

Incidentally, so does Eva Moskowitz, CEO and founder of Success Academy, the beneficiary of Loeb’s vengeful philanthropy. Moskowitz’s strident opposition to unions and aggressive expansion tactics have made her a lightning rod of charter school criticism. But the sponsorship of hedge-funders and their lot makes for remunerative spectacles like last month’s $7 million orgy of a gala. 

Conveniently, Loeb also sits on Success Academy’s board. His act of charity consists of giving a million to a nonprofit on whose board he sits in defense of another nonprofit on whose board he also sits.

But Loeb’s politically charged donation highlights one of the most remarkable and vexing phenomena of the education reform world: the uncanny syncretism of finance capitalists and school reformers. Why did managers of multi-billion dollar funds fall so suddenly for school governance?

The most immediate reason is ideology. The New York Times picked up on this in 2010, with its article “Charter Schools’ New Cheerleaders: Financiers.” Though it notes that “financial titans, who tend to send their children to private schools, would not seem to be a natural champion of charter schools, which are principally aimed at poor, minority students,” the piece cites the essentially neoliberal model charters operate on as a turn-on for hedge-funders:

The money managers are drawn to the businesslike way in which many charter schools are run; their focus on results, primarily measured by test scores; and, not least, their union-free work environments, which give administrators flexibility to require longer days and a longer academic year.

Free-market ideals of choice and competition, along with the turn from unions to privatization, align with financier’s politics. It’s blatant in investor talk, as in GSV’s consulting report “Fall of the Wall: Capital Moves to Education” (which opens with a photo of a toppled Berlin Wall), where investors hope to “turn districts into service providers,” to “regulate outcomes, not delivery mechanisms,” and to allow “schools and districts to become non-profit charters,” all of which boils down to: “more charter schools.” 

This explains the Times’ contention that financier activists became “the first significant political counterweight to the powerful teachers unions, which strongly oppose expanding charter schools in their current form.”

Another reason they support charters could be profit motive. As Juan Gonzalez of The Daily News reported in 2010, a dusty tax incentive called the “New Markets Tax Credit” is “so lucrative that a lender who uses it can almost double his money in seven years,” when combined with other incentives. Meanwhile, charters supported by public funds can see their rents double and triple, as in Albany and Miami. 

Though charter supporters dismiss profit motive as fantastical or unrepresentative of the movement, developers have a keen eye for charters. According to the improbably surnamed David Brain, CEO of Entertainment Properties Trust, charters are the “highest growth and most appealing sector of the portfolio.” This is particularly true since “the state is the payer on this category,” making charters a “high-growth, very stable, recession-resistant business” — and by business, of course, Brain must mean public institution. It’s no small part of the reason investors see “entire ecosystems of investment opportunity” in education reform.

But perhaps the easiest way to think about the hedge-fund preoccupation with charters hearkens back to the philosopher from Rhineland. With teachers and their unions opposing charters and their backers, it’s just the old labor and capital seesaw rocking again. Teachers unions comprise two of the three largest labor organizations in the country. They are a cornerstone of Democratic support. Some ancient, subconscious instinct compels hedge funders to oppose teachers unions, and the most direct way appears to be funding charters. 

Take the Walton Family Foundation. The Walmart founding family has donated millions to charter-boosting organizations such as StudentsFirst and Education Reform Now, a coalition of charter groups whose board is composed entirely of money managers. It’s also behind ads with subtle messages like “Stop listening to the teacher’s union.” 

We shouldn’t be surprised that the infamously anti-labor Walton family makes their largest philanthropic donations to “charter school education-reform” (in Dan Loeb’s words). Their donations, with the Gates and Broad Foundations, make them one of the prime engines of education reform.

Loeb and the Waltons are just individual examples; look anywhere charter schools have popped up, and you’ll find hedge-funders and capitalists quietly sowing the fields or publicly hawking their crop.

But what makes this episode so notable is the directness, even candor, that Loeb displays in his antipathy to unions. There are no tearful stories of academic triumph here, no Harvard Graduating Class of 2022 singing Carly Rae Jepson tunes for the amusement of CEOs. There’s just Loeb. He’s telling unions he’s going to hit them, and that it’s going to hurt. And when he strikes, he does so by funding a charter.

In this sense, we can finally see a point of agreement between reformers and unions. Charters, after all, really are the unions’ kryptonite.