The strength of endowments

Universities are beginning to invest money contributed by alumni and entrepreneurs

fapesp-provazi-final01NELSON BROVAZIDonations from alumni, entrepreneurs and philanthropists are essential for maintaining the world’s leading research universities. In the United States, for example, up to 40% of the budget of institutions such as Harvard University and the Massachusetts Institute of Technology (MIT) comes from so-called endowment funds that consist of donations from large donors, and the income is invested in research, infrastructure and grants. In Brazil, although this model is not yet widely used, it is beginning to show signs of life. No fewer than eight universities and research institutions are setting up funds of this type to supplement the traditional sources of funding for education and research. The leading example in Brazil is the Polytechnic School of the University of São Paulo (Poli-USP), which launched two endowment funds in the last three years: Amigos da Poli, with an endowment of R$5 million; and the Endowment da Poli, with R$800,000.

Today there is talk of the possibility of combining the two funds into one entity. “Both were set up for the purpose of assisting Poli. The difference is in the way each one was conceived,” explains Vahan Agopyan, Vice President of USP and board member of Amigos da Poli. The Endowment da Poli sprang from a student organization project at the school and is run by the office of the director of the school in partnership with the students and the Association of Polytechnic Engineers, which brings alumni together. Amigos da Poli was created and is administered by a group of former students, including entrepreneurs and executives who graduated from the school, such as Roberto Setubal of Itaú Unibanco, Rubens Ometto of Cosan and Pedro Wongtschowski, former CEO of Ultrapar and member of that company’s board. It was actually Wongtschowski who made the first donation and supplemented the seed money to create the fund. “Brazilians are not in the habit of recognizing the importance of their alma maters. At the Poli, some people who have studied there maintain a strong emotional tie with the school,” says the entrepreneur, who majored in chemical engineering and has a master’s degree and PhD from Poli-USP; today he chairs the board of Amigos da Poli. “It was not by chance that the first experiment with endowments took place there.”

One of the first recipients of this type of donation in Brazil was Keep Flying, a team of aeronautical design students who graduated from Poli-USP in 2003. They purchased two new computers with high data processing capacity. “We needed to make a leap forward in quality,” says Victor Pinheiro Rosa, a third-year engineering student in telecommunications and member of the team. In 2013, Keep Flying won the first call for funding launched by Amigos da Poli and received R$30,000; roughly half of that was used to purchase the computers. “We used the computers to make calculations more quickly and to design more efficient and responsive airplanes. We also developed performance evaluation algorithms and software,” the student notes. Although the funds came from the Poli budget (the group’s main sponsor), a bidding process will be required for purchasing the equipment as required by the university’s charter. “This would force us into a much longer process for purchasing less costly and probably lower quality equipment,” Rosa says.

Amigos da Poli also helped give impetus to activities carried out by APĒ, a group of urban mobility students from the school, other units at USP and other universities. The team received R$25,000 from the fund, which its members used to attend conferences, promote lectures and discussions and organize workshops and public hearings in cities in the interior of São Paulo State. The funding was also used to set up an exhibit on new proposals for urban space in São Paulo in partnership with the São Paulo City Museum. “All of this was made possible with the support of the endowment fund,” says Mateus Humberto Andrade, a sixth-year civil engineering and architecture student at USP and member of APĒ. “Not only does the fund enhance the activities, but it also makes possible activities that require larger investments, thereby contributing to training the students that are involved and the target audience of our studies,” Andrade says.

Projects supported by Amigos da Poli: the Centrolugar exhibit at the City Museum in São Paulo...

Léo RamosProjects supported by Amigos da Poli: the Centrolugar exhibit at the City Museum in São Paulo…Léo Ramos

For now, the priority has been to provide support to projects that would not easily obtain financing through traditional methods, such as development agencies. “It will take 10 to 20 years to see any substantial results. We are doing this for the Poli-USP graduates of the future,” says José Roberto Cardoso, former director of Poli-USP and Endowment da Poli. According to Vahan Agopyan, who in addition led the Polytechnic School from 2002 to 2005, the endowment should complement development agencies. “With the resources from the fund, we will be able to pay for high-risk research projects or bring in researchers from abroad,” Agopyan observes.

Endowment funds are different from traditional donations, which use funds directly to renovate a laboratory or build a library; endowment funds aim to create permanent assets. The endowment is placed in investment funds and only a portion of the earnings from the endowment is used periodically. “That is why an endowment requires a vote of confidence from the donors,” says attorney Felipe Sotto-Maior, Director of Vérios, a firm that specializes in investments and in 2011 helped structure the legal model for Poli’s pioneer Endowment. “In Brazil, however, most potential donors would still rather contribute to specific and short-term projects,” he says.

To be sure, there are exceptions, such as the case of the Maria Cecília Souto Vidigal Foundation (FMCSV) in São Paulo. In 2006 the foundation set up an endowment fund to ensure the long-term sustainability of the projects supported by the institution. The initial support was given by the institution’s founders, banker Gastão Eduardo de Bueno Vidigal and his wife, Maria Cecília Souto Vidigal, who established it in 1965 to foster research in hematology. “The success of the fund is attributable primarily to the establishment of an investment policy and a sound governance structure for making strategic decisions,” says Ricardo Yukio Sueyasu, manager of the FMCSV endowment fund. In 2012, with all the income from the endowment fund, the foundation allocated R$10 million to its programs and projects. One of these is the Science Center for Children (Núcleo Ciência pela Infância), the outcome of a partnership with the Center on the Developing Child and the David Rockefeller Center for Latin American Studies, at Harvard University, the USP School of Medicine and Insper – the Institute of Education and Research. The FMCSV maintains a cooperation agreement with FAPESP to support research in the area of child development. By 2015, each of the two institutions will spend R$1.3 million on research projects.

The difficulty of raising the initial funds is one of the key problems faced by institutions that create endowment funds. “Poli, which has many alumni, is different from the Technological Institute of Aeronautics (ITA), which has a smaller community of students and not as many graduates; this makes initial fundraising difficult,” says Leonardo Frisso, a fifth-year aeronautical engineering student at the ITA and one of the persons in charge of the project to create the endowment for the institute. In 2013, 95 engineers graduated from ITA, while there were 595 graduates from Poli-USP. For Professor Rui Albuquerque, advisor to the Office of the President of ITA, one solution is to enlist companies interested in collaborating with the fund. Albuquerque says that the problem is that Brazil has no experience in administering and managing endowment funds.

... and the team from Keep Flying, the aeronautical design firm

Léo Ramos… and the team from Keep Flying, the aeronautical design firmLéo Ramos

“There is an imbalance between what the university really needs and what donors believe deserves to be turned into a reality. Many firms prefer to enter into agreements with the university for specific projects,” according to Albuquerque, who lectured on the topic at the Excellence in Higher Education Symposium that was held in January at FAPESP. One example of this is a fund that already exists at ITA, managed by the Santos Dumont Academic Society, with a budget of R$343,000. However, the fund is not an endowment because the money that is donated is spent directly on specific short-term projects.

The Law School at the São Paulo Getulio Vargas Foundation (FGV-SP) established an endowment fund in 2011 to sponsor grants for undergraduate students. Beginning in 2012, the school began to select 10 students per year that passed the university entrance examination but were unable to pay the monthly tuition; the Foundation gives them a grant of R$850. The grants are paid from income generated by the endowment fund created by former students and parents of students. The law course at FGV is full time for the first three years, so that the students cannot work during that period. “Many students who passed the university entrance examination but were unable to pay the monthly tuition eventually dropped out,” says Rafael Andrade, director of the endowment fund and former FGV-SP student. Beginning in the fourth year, the course is no longer full time and the students can begin working. But those students who wish to move into undergraduate research may continue to receive the grant. Because fundraising is difficult, some of the fund, or roughly R$300,000, is used directly for the grants. “This is inconsistent with the idea of an endowment. Ideally, we would use only the income, but this is not yet possible,” Andrade explains. In Brazil, endowment funds have started out with small budgets, which is different from the situation in the United States. A Brazilian model needs to be developed, as opposed to simply importing the US system as if it were the only one,” Andrade suggests.

Other challenges for strengthening the model include the lack of specific legislation and the negligible culture of donations in Brazil. Vahan Agopyan points out that, in Brazil, donors are “punished” in terms of taxes. “Anyone who donates more than R$48,000 must pay taxes. Donations are subject to a state tax of 4% of the amount of the donation,” he says. Not only is the donor penalized, but the funds also suffer in this process, says Agopyan. “Taxes amount to about 70% of Amigos da Poli’s expenses. This is wrong, because the fund does not aim to make a profit and it should not be taxed as if it were a business,” he says.

The laws of Brazil do not yet recognize endowment funds. “In other countries, such as France, an endowment is a specific legal entity. We need to have parameters of what the law recognizes as endowments, and based on that we can open the way for tax incentives,” says attorney Felipe Sotto-Maior. Currently, five draft laws that deal with donations to public universities are moving through the Chamber of Deputies. Most propose measures for deducting donations from the income tax; one measure by Deputy Bruna Furlan of the São Paulo contingent of the Brazilian Social Democratic Party (PSDB-SP) deals specifically with endowment funds. Now being studied in the Education Committee in the National Congress, the draft law proposes creating an endowment fund at each federal institution of higher education in Brazil. Tax-exempt donations would also be permitted for these funds and up to 12% of the tax owed by the donors would be deductible. It is expected that the draft law will be considered this year. In February, Carlos Américo Pacheco, President of ITA, attended a meeting with members of Congress in Brasília. “The deputies are willing to enact the draft laws that would in large part address the tax issue. In addition, the effects of enacting a law for federal institutions may spill over and similar legislation for state and private institutions may be enacted,” Pacheco says.

The challenges do not seem to intimidate the institutions that have already demonstrated an interest in setting up endowments. With the upsurge in new interested entities, such as the Schools of Medicine and Architecture and City Planning at USP, the Federal University of Minas Gerais (UFMG) and the Federal University of Rio de Janeiro (UFRJ), it is expected that the model will grow in Brazil in the coming years. “It’s only a matter of time. Once the pioneer institutions have strengthened their models and been successful, others will follow in their footsteps,” Felipe Sotto-Maior believes.

A fertile environment for donations

The culture of donation is one of the key factors that explains the success of endowments in the United States. Harvard University, for example, created the first endowment fund in 1643. In 2013, Harvard Management Company, the entity of the university that is responsible for managing the endowments, had assets of $32.7 billion, or 6.5% more than in 2012, when the fund’s assets amounted to 35% of the university’s revenue. Yale (with an endowment of $20 billion), Princeton ($18 billion) and MIT ($9.7 billion), are also members of the group with endowments in the billions. These resources are used for research as well as maintaining the institution’s infrastructure.

Graduation at Harvard University in the United States:  $32.7 billion in funding from the endowment that is used for research, university infrastructure and grants

Harvard University Graduation at Harvard University in the United States: $32.7 billion in funding from the endowment that is used for research, university infrastructure and grantsHarvard University

Because of the fertile environment for donations in the United States, some Brazilian entrepreneurs have donated funds to U.S. institutions. One well-known case is Brazilian entrepreneur Jorge Paulo Lemann, owner of the Ambev brewery and currently the wealthiest man in Brazil according to the Forbes magazine ranking. In 1999, Lemann donated funds to the David Rockefeller Center for Latin American Studies at Harvard, where he graduated with a degree in economics in 1961. The entrepreneur followed a tradition in which former students who accumulated wealth would pass on part of their estate to the institution where they studied. With Lemann’s investment in Harvard, the Center was able to accommodate Brazilian grantees and professors. In 2012, the Lemann Foundation and Stanford University officially opened the Lemann Center for Educational Entrepreneurship and Innovation in Brazil at the university’s School of Education. The center’s objective is to further the training of Brazilian professionals who are responsible for training educators, and the center also supports research in education policies. But why did Lemann not create the center in Brazil? “Roughly 70% of the money he gave to the center is used to train human capital: students who return to Brazil after their studies. According to Lemann’s vision, this is the best possible investment for Brazil,” says Paulo Blikstein, an engineer who graduated from Poli-USP and is the director of the center at Stanford. According to him, the fact that the donation was given to Stanford benefits Brazilian institutions indirectly. The center has agreements with the University of Campinas (Unicamp), the Federal University of Minas Gerais (UFMG), the University of São Paulo (USP), as well as the Institute for Applied Economic Research (Ipea). “In the United States, endowment funds are able to finance high-risk research, which development agencies are sometimes unwilling to fund. In Brazil, this is still far from a reality. Sending Brazilians to centers of excellence abroad is a way to invest in Brazil without having to go through the red tape that donations must deal with in Brazil. The two are not mutually exclusive,” Blikstein says.