USF’s Offshore Investments Revealed and Explained

By Gabriel Greschler and Ethan Tan

When you think of investments the University of San Francisco normally makes, they’re probably in Apple, Google or Facebook stock.

This is not always the case. Financial documents obtained by the Foghorn show that USF regularly invests in offshore entities to grow their endowment, a practice other universities also engage in.

In 2006, USF’s key financial decision makers invested $2 million in an offshore private equity firm in the Cayman Islands. The investment was partly tied to Royal Dutch Shell, the British-Dutch oil and gas company.

The 2006 investment was discovered by the Foghorn through a larger set of 2017 financial leaks called the “Paradise Papers,” which were shared with our publication by the International Consortium of Investigative Journalists, who obtained them from the German newspaper Süddeutsche Zeitung.

While both The New York Times and The Guardian have covered universities investing offshore, USF’s participation hasn’t been previously reported.

Connection to fossil fuels

The fund USF invested in was a private equity firm called Coller International Partners V-B. This type of financial structure is where investors pool their funds together and use the total sum of money towards a portfolio that will gain returns over a long period of time.

The fund was connected to a $1 billion joint venture with Shell, according to the private equity firm’s website. The fund closed in 2007.

Specific investments by USF in fossil fuels have not been previously disclosed. There have been small efforts by students to have the University divest from fossil fuels, including a 2013 petition on as well as a staff editorial from the Foghorn that same year.

In a discussion at the Commonwealth Club in 2015, President Paul J. Fitzgerald said the University had investments in coal and tar at the time, but that they would soon end. “We have a very small [investment in] coal in one instrument, and when that instrument matures we’ll be done,” Fitzgerald said.

A student group formed in February is trying to get more input on where the University puts its money. The Student Transparency Investment Committee, or STIC, enables senior Chelsea Mathews to sit in on meetings with the Board of Trustees Investment Committee. Another selected student will replace Mathews next year.

“Student Transparent Investing Committee (STIC) was unaware of the information presented in the Paradise Papers,” Mathews said in a statement to the Foghorn. “We would like to point out that STIC was created this year in order to ensure the alignment of USF’s future investments with student and Jesuit values.”

Tax consequences

Why does USF make these investments?

Dominic Daher, USF’s associate vice president for tax compliance and internal audit, said these investments are made “to make money. It’s that simple. It’s about investment returns. No different than a for-profit corporation would do. We want to make money from our investments.”

USF is a tax-exempt non-profit organization — commonly known as a 501(c)(3). Having this tax-exempt status excuses USF from paying annual federal income taxes on any investments that go towards its endowment.

However, if the University or the private equity firm borrows money to make its investments, USF can be taxed. These taxable investments are called unrelated business taxable income (UBTI), and they are taxable because they are not related to the purpose of the non-profits organization.

For example, USF has to pay UBTI on the revenue it makes off of Koret Health and Recreation Center memberships, as it is unrelated to the educational purpose of the University.

USF does not pay UBTI on its investments in the Cayman Islands, however, because it uses a blocker corporation, according to Daher. Blocker corporations are set up by private equity firms, and pay any taxes incurred by investments for the organization investing in it.

This adds an extra layer of protection for tax-exempt organizations like USF so that they won’t encounter UBTI.

Daher said that the University has utilized blocker corporations “to legally minimize taxes.” He also said that the USF has never borrowed money to make investments.

Samuel Brunson, professor of tax law at Loyola University Chicago, said, “I don’t want to say it’s either good or bad that tax-exempt organizations go through tax blockers. But what I will say is it’s common. It’s pretty universal.”

Norman Silber, a Hofstra University law professor, devoted an entire research paper in 2015 to the topic of tax-exempt organizations using blocker corporations. “As a tax avoidance technique, the use of foreign blocker corporations is unobjectionable and represents navigation rather than gaming of the current legal and tax regime,” Silber concluded in the paper. Silber did note that blockers can lead to investments that are less transparent.

Growth in Central America and the Caribbean firms

The financial documents reviewed by the Foghorn only included the 2006 investment in the Cayman Islands.

However, a look at USF’s 990 forms, a public IRS document the University must fill out to retain its non-profit status, shows increased growth in investments located in Central America and the Carribean. This is one of the 10 regions around the world in which the IRS requires non-profits to declare foreign money.

Investments in Central America and the Carribean have shot up from $1,198,072 in 2010 to $31,014,704 in 2017, a 25-fold increase.

Because of the way private equity firms work, after the University invests, money is usually invested in companies all around the world, not just in Central America and the Carribean.

Daher said that these numbers reported in the 990 forms are market values, meaning they are the amount the funds are worth at the moment, not necessarily how much money the University has placed into a particular investment.

Daher also explained why there were large amounts of money in this particular region. “The region itself has the infrastructure, it has the banks, it has the lawyers, it has the insurance,” he said. “It has all the things you need in order to make these funds happen.”

Vice President of Business and Finance Charlie Cross said in an interview that the University does not invest based on any specific location.

Daher said, “We don’t care if it’s foreign or domestic. We’re going after returns. We want solid investment returns. And I think it’s really that simple.”


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