With the W.K. Kellogg Foundation, ImpactAlpha is lifting up investment strategies that are expanding opportunity in a complex operating environment.
In the wake of the COVID-19 pandemic, recent National Assessment of Educational Progress results confirm that student learning outcomes are on the decline, with the gap widening in reading and math scores for students from low-income communities.
Unfortunately, this is a trend that predated the pandemic, driven by myriad factors including inadequate funding and resources. This gap is exacerbated by the fact that less than 20% of instructional materials in use in American classrooms are considered high quality or aligned to standards.
We believe that high-quality instructional materials, or HQIM, in the hands of great teachers can reverse this gap and improve student achievement at scale.
Education organizations are actively working to tackle this challenge by developing HQIM, which include rigorous and standards-aligned core curriculum paired with the assessments and teacher supports needed to drive success in the classroom and beyond. However, they face a major roadblock: access to capital to scale their products to meet the growing demand.
That’s why we at Maycomb Capital launched the Educational Resources Impact Fund, or ERIF, as a new solution to provide these organizations with an alternative capital tool – debt – to grow their businesses and improve educational outcomes for kids.
Launched in December 2021, ERIF is a $20 million demonstration fund designed to test if debt could be a useful tool for education nonprofits to expand access to HQIM and ultimately improve student outcomes. ERIF is managed by Maycomb Capital, an impact private credit firm committed to driving change in underserved communities. The fund was created in partnership with some of the nation’s leading education funders – including the Gates Foundation, the Walton Family Foundation, the W.K. Kellogg Foundation, the Charles and Lynn Schusterman Family Philanthropies, and the William and Flora Hewlett Foundation.
As a demonstration fund, we were unsure how it would go. Would education nonprofits be receptive to debt? Would ERIF successfully deploy the fund’s capital? And would borrowers demonstrate an ability to repay? Three years in, we are proud to share that ERIF is fully committed, with loans to six borrowers, including Illustrative Mathematics, New Meridian, and Open Up Resources. Collectively, these six organizations serve 8 million students annually, many from low-income backgrounds, multilingual households, and communities of color.
The fund’s results speak for themselves: strong market demand, deep impact, and a robust pipeline of providers who have embraced debt as a tool for their organizations.
Maycomb Capital partnered with MGT, a social impact consulting firm, to surface learnings from the fund. Here are three key insights from ERIF’s early success.
There is a continued capital gap in the education sector
ERIF has shed light on a critical funding gap that neither philanthropy, commercial loans nor venture capital has been able to fully meet. Philanthropy is critical for early stage research and development, but often cannot meet the growing capital need that these organizations will later require to scale and operate ongoing. Commercial loans may be available, but oftentimes these lenders don’t understand or align with the needs of the education sector. In the case of for-profit companies, venture capital may introduce unrealistic growth expectations that compromise quality in pursuit of scale.
With a lender like Maycomb, we believe that debt can fill this capital gap by supplying organizations with the funding they need in real-time to manage their businesses and invest in growth, while structuring a suitable repayment window that aligns to future cash flows. This is a win-win for education organizations, students and teachers, as it has the potential to grow the use of HQIM in classrooms across the nation.
Debt can empower organizations to grow and meet their full potential
Through ERIF, we have seen how debt can help organizations unlock bigger bets and create pathways to transformative educational outcomes. Our borrowers have pointed to ERIF as one factor enabling them to grow faster, take strategic risks, pursue larger clients, and evolve their financial models. For example, one ERIF borrower had an opportunity to bring on a large new district client to nearly double their revenue, but needed an up-front investment to deliver on the new contract. ERIF successfully filled this gap, allowing this organization to successfully meet the needs of this transformative deal, both impacting more students and shifting their business model and mindset to be ready for significant growth.
The demand for debt is stronger than we anticipated from borrowers and investors alike
ERIF has demonstrated the continued need and demand for debt. Not only is the current fund fully committed and performing as expected, but we have seen an uptick in inbound interest from both nonprofit and for-profit education organizations seeking debt as a tool to scale their businesses. Borrower satisfaction is also at an all-time high, with a reported net promoter score from borrowers of 97 out of 100. We believe this is a testament to the unique value proposition of a firm like Maycomb that combines the best of financial rigor, steeped subject matter expertise, and a steadfast commitment to impact.
Investors are also recognizing the value of impact private credit funds, appreciating their liquidity profile, the structured risk-return balance, and ability to track impact. We believe ERIF’s early success is a proof point that debt will be a growing capital tool for many mission-driven organizations, and a strategy that will be increasingly embraced by investors.
ERIF’s success has demonstrated that debt can be a powerful tool for education organizations, both nonprofit and for-profit, to move beyond early-stage funding constraints and expand their businesses and impact.
And these lessons can be applied to other sectors as well, including health and human services, where we have seen firsthand how debt can be a transformative tool when structured to meet business needs. In uncertain funding environments, debt can also be a critical source of cash flow to help organizations continue to operate with fewer disruptions.
We are working to build a coalition of investors, funders, and education organizations committed to expanding the funding options available to transform the sector. By broadening access to capital for education organizations, we can ensure that every student, regardless of their background, has access to the high-quality educational resources they need to succeed.
Miljana Vujosevic is a partner at Maycomb Capital and Caitlin Day-Lewis is vice president at MGT
