Editor’s note: This story is part of a series on the role of corporate influences in Syracuse University’s governance and campus politics, based on dozens of interviews with faculty, staff, students, university leadership, higher education experts and other outside experts.

As Syracuse University’s endowment has grown during Kent Syverud’s tenure as chancellor, so have its investments in a particular region of the world: Central America and the Caribbean islands.

The university had more than $255 million invested in that region during Fiscal Year 2016, the year for which SU’s tax returns are most recently available. That was up from $187 million in Fiscal Year 2013, the year before Syverud officially became chancellor.

Tax experts said those investments are likely in private equity funds and hedge funds located in offshore tax havens, such as the Cayman Islands. By investing in offshore funds, SU is contributing to a trend that critics say increases wealth inequality by enabling companies and wealthy individuals to avoid taxes.

SU’s investments in private equity and hedge funds extend beyond tax havens. The university had a total of more than $500 million invested in those areas during Fiscal Year 2016.

It’s a strategy of investing experts said could be risky because high returns aren’t guaranteed and the assets are illiquid, meaning investors can’t pull their money at any given time. But it’s also one that’s common across higher education because, at their best, private equity and hedge funds offer lucrative returns, experts said.

“Everybody is in this race for bigger endowments because there’s a belief that a bigger endowment is just better and signals that you’re a better school,” said Thomas Gilbert, an assistant professor of finance at the University of Washington who studies university endowments.

Typically when universities invest in private equity, hedge funds or other corporate entities unrelated to their educational missions, they are required to pay an unrelated business tax. But by investing in funds located in tax havens, universities avoid paying that tax.

Two experts said SU’s investments in Central America and the Caribbean are likely investments in tax havens: Samuel Brunson, a law professor at Loyola University Chicago; and Norman Silber, a law professor at Hofstra University.

Tax havens in that region include the Bahamas, Bermuda and the Cayman Islands. Corporations often set up subsidiaries for profits in those locations to avoid paying federal income taxes.

The New York Times reported in November that SU invested in an offshore fund owned by EnCap Investments, a private equity firm.

Critics say tax havens disproportionately benefits wealthy individuals. The top 0.1 percent of the world’s richest households own about 80 percent of offshore wealth, according to research by a group of academics from University of California, Berkeley, University of Copenhagen and Norwegian University of Life Sciences.

At least one SU official is personally connected to tax havens. Steven Barnes, the chair of SU’s Board of Trustees and an executive at private equity firm Bain Capital, is listed as an executive officer of at least four Bain Capital funds in the Cayman Islands, according to Securities and Exchange Commission filings. Barnes did not return a request for comment.

Brunson, the Loyola law professor, said “there are very few good reasons” for individuals to invest in offshore accounts.

“There are plenty of bad reasons, including keeping it out of the hands of creditors, keeping it out of the hands of the (IRS),” he said.

SU’s investments aren’t limited to offshore accounts. The university has also invested in a range of private equity funds registered in the United States, including funds owned by ABRY Partners, Great Hill Partners, Goldman Sachs Capital Partners and H.I.G. Capital Partners, according to its tax returns.

SU had about $270 million invested in private equity during Fiscal Year 2016 and another $238 million invested in hedge funds. Experts said those investment trends can be risky.

Eileen Appelbaum, co-director of the Center for Economic and Policy Research and private equity expert, said universities would be smart to consider alternative investment strategies. Her research has found that private equity hasn’t outperformed the stock market since 2006, despite claims to the contrary from private equity industry leaders.

“I’m sure (SU’s) Board of Trustees has drunk the Kool-Aid and has accepted the argument that private equity is going to outperform the stock market, and you have to be invested in it because you need something that’s going to give you higher returns,” she said. “… They’re a really risky investment, and they do not give you higher returns than you could get with a much less risky investment in the stock market.”

Gilbert, the finance professor at the University of Washington, said private equity and hedge fund investments are especially risky because they’re illiquid assets. Investors can’t pull their money out or sell their funds without facing penalties.

In part because of their investments in private equity and hedge funds, many university endowments suffered during the financial crisis between 2007 and 2009, Gilbert said. SU’s endowment dropped from more than $1 billion in 2007 to just over $550 million in 2009.

SU’s endowment has since recovered, surpassing $1.25 billion for the first time ever last year. But Gilbert warned that it and other endowments will likely be at risk if another financial crisis hits.

“The next crisis is coming,” Gilbert said. “I don’t know when the next crash will be or how severe it will be, but it’s coming. And it will hurt.”

Published on April 25, 2018 at 8:03 pm

Contact Michael: mdburk01@syr.edu