Many people have asked the question.
Some are idealistic.
Some think they know how to reform schools.
Some think that all schools should be like KIPP.
Some think that the free market cures everything.
But others see profits.
Julian Vasquez Heilig explains it here.
Juan Gonzalez came to the same answer over two years ago.
In 2000, Congress passed the New Markets Tax Credit as part of the Community Renewal Tax Relief Act.
This act gives tax credits for investing in certain kinds of projects.
Investors can make large profits.
That explains a lot.
That explains why so many hedge fund managers poured money into state and local school board races in 2012, but only for candidates who support more charter schools.
Diane Ravitch's blog 
Really bad article. The argument is that bonds issued by charter schools default at higher rates than bonds issued by local and state governments. Because these bonds are riskier, they have higher yields. Obviously, they have higher yields because investors won’t lend them money unless they get extra compensation for the extra risk. And as it turns out, some investors are buying these bonds, which offer good returns (assuming they don’t default) in a market where interest rates are basically nil.
So, from the fact that some investors are buying high-yield education bonds, we’re supposed to conclude . . . what, exactly? That “hedge funds managers” love charter schools because they make money from them? Unless the bonds default and they don’t make money from them? And without any evidence of what percentage of the investors in these bonds are “hedge fund managers,” much less “hedge fund managers” who love charter schools? And even though apparently, as we’re told in another recent post, there are “obscene” profit opportunities in capital appreciation bonds issued by governments to fund public school construction?
Is it too much to have some kind of standard for our arguments? Does it have to always just be a grab bag of whatever seems like it will work best at any given moment?
No — the argument is that the federal govt provides a tax credit equal to about 5%/yr for 7 years for $ invested in certain charter schools (a tax credit that the investor receives in addition to the interest that the investor receives on the bonds issued by the charter schools). If the charter school bond is paying 8% interest (the example cited in the article), then the investor is receiving an annual return on his investment of 8% in taxable interest income and 5% in a tax credit that the investor can use to reduce his taxes generally — in effect, the equivalent of an after-tax return on investment of about 10-11% for an investor in a 35% marginal tax bracket. .
Did you read the article? If not, you’re missing the central portion that concludes with “Higher rates of closure = higher risk = higher bond rates.” And click on the WSJ link that’s cited as evidence — it’s all about the yield rates.
As for the tax credit, I’ll have to take your word for it that a significant portion of charter school bond investments are made using this program and this structure, which involves buying an interest in an SPV (here, a “Community Development Entity”) set up and authorized to buy and hold the bonds. I’ll have to take your word for it because (1) I don’t know the answer and (2) apparently neither does the author of the linked “article,” since he doesn’t mention it.
Also, note that there are big tax incentives to buy muni bonds. Which must be why hedge fund managers love public schools — or no, wait, was it charter schools . . . they love something, I just can’t remember what or why . . .
Thanks for this info — I’ve been following the charter school debates for several years and had not heard about this tax credit before. If all this is true, it certainly gives investors a strong incentive to invest in charter schools (and to support govt policies that replace neighborhood public schools with charter schools).
Diane — Can you independently verify that this tax credit is available for charter school investors? Does the credit apply to $ invested in charter school bonds as opposed to $ invested as equity capital in the charter school?
http://www.lisc.org/section/ourwork/national/education