The California Public Employees’ Retirement System (CalPERS) is getting dragged back into court over its refusal to disclose certain private equity fund investment information.
Last Tuesday, the California First Amendment Coalition (CFAC) filed suit in San Francisco Superior Court, requesting that CalPERS be forced “to release all reports showing the amount of fees paid to venture capital and hedge funds, identifying amounts paid to individual funds.”
The request does not formally request the same release in regards to other private equity funds – such as leveraged buyout or mezzanine funds – but such information had been requested in a May 24, 2004 letter from CFAC to CalPERS.
“Our main emphasis is on venture capital funds, with a secondary emphasis on hedge funds,” says Peter Scheer, executive director of CFAC. “We don’t mean to leave out LBO funds or others though, so we would consider those included in what we’re asking for.”
Scheer acknowledges that certain LBO funds base their fee structures on a transactional basis – as opposed to the per annum structure of most VC funds – and that the release of such fees could inadvertently disclose private financial details of buyout transactions. As such, he concedes that some information might need to be kept secret, depending on the specific circumstances.
CFAC is a nonprofit coalition of media trade organizations founded in 1988 by organizations like The Los Angeles Times, The Sacramento Bee, The San Francisco Chronicle, The San Jose Mercury News, the University of Southern California and Ernst & Young. CFAC was not party to a 2002 suit in which the Mercury News requested private equity fund performance information from CalPERS (including internal rates of return), although the lead attorney in that case, Karl Olsen, also is representing CFAC.
Both Scheer and Olsen say that the public has a right to know where CalPERS is sending its hundreds of millions of dollars in management and advisory fees. Neither man suggests that CalPERS either is being price-gouged or is engaging in political cronyism, but they do argue that fuller disclosure is the only way to be certain.
Currently, CalPERS only discloses aggregate management and advisory fee expenditures. For fiscal 2002, the system spent $187 million on such expenditures for direct management costs of VC and LBO funds, as compared to $431.71 million for management costs of the entire CalPERS portfolio.
CalPERS issued a statement last week that it had not yet reviewed the lawsuit, but that it believes the public disclosure of management fee terms could cause CalPERS to be evicted from existing partnerships, and to be shut out from future partnerships. This is a similar defense to what CalPERS argued in the 2002 case, in which a judge tentatively ruled that only underlying asset data, not top-line performance data, qualifies for trade secret protection. CalPERS later settled that case out of court, and published performance data on its website.
CalPERS also faces an additional trade secret test, in that a substantial amount of management fee data already has been published in both the popular and trade press (PE Week is cited in the CFAC complaint).
A stronger defense is found later in the CalPERS statement, when it suggests that VCs would be less likely to negotiate favorable management fee terms, were the information to be publicly disseminated. CalPERS is the nation’s largest public pension system, and those deep pockets can double as leverage at the negotiating table. For example, CalPERS may be able to muscle a firm’s 2.5% management fee down to 2%, while other LPs in the firm’s same fund remain at the original level. Were this double standard to be confirmed in fee management disclosure, however, VCs might halt the practice to avoid embarrassing or offending other LPs. At this point, CalPERS’ ability to maximize investment returns for its pensioners would be compromised, thus activating an exemption to the California Public Records Act.
The legal ball is now in CalPERS court, as it must file a defense brief by Sept. 26. A hearing is scheduled for Oct. 6, with Judge James Warren presiding.