Austin Ventures, the most prominent venture capital firm in Texas, announced last week that it will not accept any Texas-based pension systems as limited partners in its ninth fund, which is scheduled to close Thursday with $525 million in commitments.
The decision was prompted by increased concerns over the interpretation of Open Records laws by Texas AG Greg Abbott, whose office has previously confirmed that he supports the disclosure of underlying asset information like portfolio company valuations and revenue streams. The formal statement itself, however, was designed to draw attention to current legislation designed to address the disclosure issue.
“We’ve lived with the open records environment in Texas for years,” says Joe Aragona, general partner and co-founder of Austin Ventures, which historically has taken money from such groups as the University of Texas Investment Management Co. (UTIMCO), the Teachers’ Retirement System of Texas (TRST) and the Houston Police Officers’ Pension System. “What we object to is how some open records bureaucrats in the attorney general’s office are changing their minds on how to interpret existing laws, and then making legislators come back and fix what the bureaucrats have just blown up.”
The disclosure issue in Texas has done more than just affect Austin and its ninth fund. UTIMCO chief Bob Boldt told a legislative committee that his group has been shut out from follow-on commitments to funds from American Securities, Barclays Private Equity, Foundation Capital and Prospect Venture Partners, because of the state’s stance on disclosure. However, UTIMCO has been able to make three fund commitments so far in 2005, with Pomona Capital, Prism Ventures and OCM/GFI Power Opportunities Fund II, which follow late 2004 commitments to Union Square Ventures, The Carlyle Group and Doughty Hanson & Co.
Texas did not permit much disclosure of private equity fund information until late 2002, when John Cornyn – who was then attorney general and is now a U.S. senator – opined that UTIMCO must release top-line data for all of its general partners in the private equity and venture capital markets. He drew the line at underlying asset data, however, believing that such disclosure could unfairly harm fund performance by, among other things, violating portfolio company trade secrets.
Abbott issued similar opinions in his first days as Cornyn’s successor, but later changed his mind. He also ruled that TRST must abide to a newspaper request for certain underlying asset information related to a limited partnership interest in Texas Growth Fund. TRST and TGF are fighting that ruling in court (see PE Week, 10/11/04).
Abbott then delivered a speech in which he said: “The people of Texas – whose retirement savings and pensions are directly affected by these investment decisions – deserve no less than to have the light shine on the investment of these dollars.” The speech, which came before the Freedom of Information Foundation of Texas in October, made Abbott the first attorney general in the nation to publicly declare his support for the disclosure of underlying asset information.
In his speech, he added, “There is no proof that secrecy will ensure good investments, but it is true that secrecy can conceal bad investments.”
Abbott then reversed his stance in December, when he expressed his support for prospective legislation that would govern what types of investment information should, and shouldn’t, be subject to open records law. The pending bill comes with a list of 13 items that would be explicitly subject to disclosure. A final clause says that all other types of information requests would be decided on a case-by-case basis by the attorney general.
Meanwhile, Texas State Rep. Dan Gattis (R-District 20) is sponsoring a House version of the bill. Gattis acknowledges that the current language does not come close to satisfying people like Aragona, who testified on the bill in front of a legislative committee last week. “We need to strike a delicate balance… because private equity [investment] is really the future for UTIMCO and others,” Gattis says. “The problem is that the VC boys want us to say everything but those 13 items are confidential, but we just can’t do that.”
Gattis is concerned that future open records requests might concern items that legislators had not considered in drafting this bill. He supports a clause that would prevent disclosure of data that demonstrably harms fund performance, although the final decision, he says, still likely would rest with Abbott. Unlike Aragona, however, Gattis believes that Abbott’s disclosure position is malleable, and that a few VC-friendly public comments could go a long way.
None of that, however, will be soon enough for Austin Ventures. The firm will close without any public Texan institutions, although it will accept public LPs from states such as Washington, Virginia, Michigan, Massachusetts and, most likely, California. Many of those states do provide for limited investment disclosure, but not of underlying data.
“I’m a Texan first, so this is very sad,” Aragona says. “But it’s necessary.”