CalPERS Decision Threatens Confidentiality of Venture Returns

VCs: First the bad news.

The world at large may soon have access to internal rates of return (IRRs) for the 250 private equity funds in the California Public Employees’ Retirement System’s (CalPERS)$20 billion private equity portfolio. On the flip side, it appears unlikely that venture capitalists will be forced to explain how those IRRs were derived. In other words, people can see the sausage, but not the stuff inside, like portfolio company valuations, fund investment strategies or accounting methods.

In a tentative ruling at last Thursday on a suit filed by the San Jose Mercury News against CalPERS, the nation’s largest public pension fund, Judge James Robertson of San Francisco’s Superior Court decided that IRRs do not constitute a trade secret and should be made available for public consumption. He will make a final decision Jan. 30. Any underlying fund performance data, including the identity and value of every company in a fund’s portfolio, is competitive information that should remain confidential, the judge said at the hearing.

While several CalPERS’ GPs say it is too soon to determine whether or not they would contest the IRR ruling, an attorney representing a number of CalPERS’ GPs did say that some of his clients were adamant about not having their IRR information released. “Most of them are more concerned about portfolio company information being published, but some will most likely file [declarations that their IRRs are trade secrets].”

A GP may argue that the IRR is the result of trade secret-protected accounting methodology and, as such, inextricably linked. Likewise, a GP could say that the IRR is essentially an aggregate figure of private company valuations, which are protected as trade secrets.

“A trade secret is generally something that someone takes extra care to protect,” says a venture capital attorney. “Since most funds market and form partnership agreements on new funds with nondisclosure agreements (NDAs) attached, I don’t see why trade secret wouldn’t apply.”

Karl Olsen, a lawyer for the Mercury News, argued at Thursday’s hearing that recent open disclosure agreements by institutional investors like The University of Texas Investment Management Co. (UTIMCO) make sure secrecy is a moot point. “The horse is out of the barn [on IRRs],” he told the court. “Even if [GPs] want to keep them secret, the court has to weigh the balancing test of public interest.”

The issue of public interest is important to both sides’ cases. The newspaper argues for the public’s right to know, while the pension fund argues that nondisclosure will ultimately help generate higher returns for pensioners by keeping CalPERS in top-tier funds.

The balancing act argument is CalPERS’ final line of defense if it loses in a final ruling on any contested IRR disclosures. Judge Robertson declined to hear most of the balancing act arguments were raised only in passing at the hearing. The judge was most interested in what constitutes a trade secret.

The newspaper had argued in an October pleading that CalPERS should be compelled by the California Public Records Act to release fund-by-fund performance data. Once in court, the Mercury News asked to see underlying asset data from CalPERS’ general partners, such as portfolio company valuations from the funds in which CalPERS invests.

CalPERS’ primary line of defense was that IRRs are trade secrets. But Judge Robertson disagreed and said that such data should be available for public consumption. His ruling is tentative.

Rather than slamming the door completely, the judge said that CalPERS GPs who disagree with his tentative finding have until Dec. 9 to file a declaration with the court explaining why fund IRRs should be considered trade secrets.

“The judge is being very careful on this,” says David Godkin, a partner at Testa, Hurwitz & Thibeault LLP, a law firm that represents the National Venture Capital Association. “He could have ruled that everything was or wasn’t a trade secret.”

If the Mercury News contests the declarations, a referee will be assigned to the case and make a recommendation to Judge Robertson prior to a Jan. 30 hearing.

“He’s given an opportunity for general partners to argue their case,” says Pat Macht, head of public affairs for CalPERS. “He’s trying to get the contestability down to who is actually asserting the trade secret protection.”

As for underlying asset data, including the identity and value of every company in a fund’s portfolio, Judge Robertson said that it is all competitive information protected as trade secrets. The only exemption would be if a GP released this information without confidentiality attached. If the GP kept this information secret then it must submit a letter certifying such secrecy to the court. The Mercury News has the right to challenge those letters. A referee will be brought in to make a recommendation and Judge Robertson will make a ruling rule at the Jan. 30 hearing.


Sacramento, Calif.

Members : 1.3 million

Funds CalPERS invested in: ABS Capital Partners, Advent International, Alta Communications, Atlantic Medical Capital, Aurora Equity, American River Capital, Appolo Management, Beacon Group, Blackstone Group, Blum Capital Strategies, Bridgepoint Capital, California Emerging Ventures, Carlyle Group, Coller Capital, Draper Fisher Jurvetson, Dresdner Kleinwort, Ethos Private Equity, Lexington Capital Partners, Madison Dearborn, Rice Partners, Soros Private Equity, Thomas Weisel Capital.