Charter School Investment Goes Sour...And Was Illegal
A Pioneer Press article highlighting issues with a $5m hedge fund investment made by a MN Charter School is making waves across the charter school, authorizer, and investor communities today. The full article can be read here: St. Paul charter school loses $4.3M with illegal investment in New Jersey hedge fund – Twin Cities
There are so many questions that arise from the article it is difficult to know where to begin. So, I'll help; how on earth did $5,000,000 get invested with a hedge fund by the school? Investment options for MN Charter Schools are simple and determined by state statute. Unsurprisingly, investments with hedge funds is not on the allowable investment list. But, several layers (school administration, school board, and financial consultants) of human capital safeguards, policies, and laws didn't prevent this from happening. This was not a mistake that slipped through all preventative measures in place. Which, in turn, makes the situation that much worse for all involved.
Aside from the controls that were circumvented to initiate the investment there were no monthly investment statements provided to the school or financial consultant. Given such a material, and new, investment it would be expected that investment performance reporting would have been a high priority for the school leadership. Lack for basic monthly statements should have been a major red flag. Additionally, the internal financial reporting should have tracked the monthly investment gains and losses. A basic reconciliation would have identified the investment losses in the first month of review. A vital outcome of the investigations to come will be to understand how a $4.3M loss can go unnoticed within 7 months of initiating the investment.
Lastly, (I could go on for several more pages) how will the school's bond investors respond to an investment vehicle they understand on a completely different level than most people reading this post. Ultimately, this event will impact the underwriting and analysis of future bond issuances for all MN Charter Schools. But...maybe that is needed given these developments.
Much more information about this situation will be provided as authoritative bodies work through their respective investigations. But, discerning the actual impact to the school and broader charter school community will be the most important outcome.
Stay tuned for follow up analysis as the future events unfold.
The Anton Group