The University of Chicago holds $2.8 billion in investments in Central America and the Caribbean, according to its most recent tax returns. Many universities hold similar offshore investments, hoping to avoid taxes on certain high-yield, high-risk investments.
The University has had significant assets in the region since at least 2011, the first year it was required to disclose the size of foreign investments.
In addition, the University’s returns declare full ownership of Phoenix Overlay Fund, a company based in the Cayman Islands, a British Overseas Territory in the Caribbean. According to corporate records issued by the Caymanian government, the company was first registered in April 2004.
Offshore companies are a common strategy for nonprofit investors, such as university endowments. Universities normally do not pay any corporate tax on their investments, but if the university borrows money to invest, or buys into a firm that does so on its behalf, then it has to pay normal taxes on the returns from the borrowed money. This means directly investing in many assets such as hedge funds, which borrow in order to deliver larger returns, can expose the University to tax payments.
Instead, many nonprofits buy into so-called “blocker corporations,” which can invest in other assets on the University’s behalf. Based out of jurisdictions that don’t tax corporate income, such as the Cayman Islands, blocker corporations enable Universities to profit from higher-yield assets without owing any taxes on their returns.
"If a nonprofit invests in a corporation rather than a partnership, it's not treated as borrowing money that's borrowed by the corporation,” Samuel Brunson, a professor of law at Loyola University Chicago, said. “If the University of Chicago were to invest in General Motors…it can completely ignore any borrowing that GM did. The same thing happens with a blocker fund."
According to Brunson, Phoenix Overlay is almost certainly such a blocker.
"This is what you would expect from a nonprofit with as big an endowment as the University of Chicago has," Brunson said. "The University would invest through a Cayman Islands blocker… [and] I would be shocked if Phoenix Overlay were doing anything different from that.”
Although the firm is based in the Cayman Islands, its money could be invested in the United States or any other country, depending on its investment strategy.
"[Chicago] may not actually have any money in the Caymans,” Brunson said. “The fund can invest wherever it wants, and the money is ending up where these investments are. If, for example, a hedge fund thinks it's a good deal to invest in Apple stock, the money will be in the U.S.…so although the money is reported in the Caribbean, most of it isn't actually there."
It was not clear how much of the University’s investments are held through Phoenix Overlay. Recent years’ returns show transfers of up to $2 million to and from the fund.
Many wealthy universities hold similar investments offshore. The Paradise Papers leak, which released documents from Bermuda law firm Appleby, showed that Stanford, Dartmouth, Duke, Johns Hopkins, Yale, Penn, and numerous other schools had invested overseas. The documents did not affect the University of Chicago.
Nonprofit organizations, including private universities, are required to file a detailed yearly tax return called Form 990. Like UChicago, Yale, Columbia, Penn, and Princeton all report billions in Central American and Caribbean holdings, highlighting the scale of the offshore holdings which were exposed in the leak.
Beyond tax purposes, some universities have gone offshore when investing in potentially unpopular projects. Northeastern University, Indiana University, and Texas Christian University, among others, were found to have invested heavily in fossil fuels through blocker corporations.
University endowments have recently become politically charged, with the passage of a Republican proposal to tax returns on large investments held by universities. It remains unclear whether the University is affected by the law, which applies to private schools holding over $500,000 in endowment per student.
Despite being extremely common for nonprofits, blocker funds also received little attention until recent disclosures raised their profile.
"Nonprofit investors are probably surprised at the scrutiny this is getting, because in that world, it seems fairly innocuous,” Brunson said. “In retrospect, you should realize money in the Caymans doesn’t look innocuous, but for the most part everybody from state pension funds to Universities does this."
In a statement, University spokesperson Jeremy Manier declined to comment on the purpose of the University’s overseas investments, but defended the endowment’s educational value.
“Investments are essential to the long-term management of the University’s endowment, which is a resource maintained in perpetuity that makes the University’s fundamental contributions to society possible,” Manier said. “The University has investments in the U.S. and other countries for this purpose, and these are disclosed each year as required by law.”
Asked whether taxes are paid on all high-risk investments, the University did not respond.
Euirim Choi contributed reporting.