Disclosure Battle Goes East as Mass. Aims to Cloak Data

Massachusetts could be the next state to restrict the disclosure of venture capital investment information from its public pension portfolio, thanks to a bill working its way through conference committee.

The move comes on the heels of similar efforts in Colorado and Michigan, and is intended to enhance the state pension system’s ability to both forge new VC manager relationships as well as to maintain existing relationships for subsequent fund offerings.

What remains unclear, however, is the exact type of information that would be precluded from disclosure. The proposed legislative language broadly covers the release of all documentary materials and data, whose disclosure “is likely to impair the government’s ability to obtain such information in the future, or is likely to cause substantial harm to the competitive position of the person or entity from whom the information was obtained.”

In addition, the bill would suspend open meeting laws during such times that heretofore-restricted materials are discussed by the board of Massachusetts Pension Reserves Investment Management (MassPRIM). This latter clause seems to have resulted from a lawsuit brought last year by The San Jose Mercury News and a clerical workers union against the University of California, in which the plaintiffs requested records of various closed-door sessions related to investment and advisor selection decisions.

A source close to the conference committee says that members have not yet reached consensus on what information is “likely to cause substantial harm,” or even how to define the term “substantial.”

One faction seems to favor the route taken by Colorado (See PE Week, 4/5/04, pg. 1), which would be to protect underlying asset information like portfolio company financials, while permitting the release of top-line general partner data, such as fund disbursements and internal rates of return (IRRs).

Others are looking to ape a recent Michigan law that prevents the disclosure of both top-line and underlying asset information, save for fund names, aggregate amounts of investment and aggregate rates of realized returns (See PE Week, 5/10/04, pg. 1).

Doug Rubin, first deputy treasurer of Massachusetts, says that he would characterize the proposed law as more of the Colorado route, as MassPRIM is working on a release of IRR information from its VC and private equity portfolio.

“We are trying to work through the policy now,” Rubin says. “We’ve had some conversations about restricting the release of IRRs to funds that are three-to-five years old, because those are the age where fund returns really begin to mean something.”

To date, MassPRIM has not disclosed any performance information from its private equity portfolio, save for aggregate data. It has received top-line FOIA requests from The Boston Globe, Mark O’Hare of Private Equity Intelligence (a private equity performance database provider) and a private individual named Mark Wiener. The system has not yet received any formal requests for underlying asset information, although another public pension fund in Massachusetts received a general information request that it interpreted to include underlying assets. It did not comply, and the matter is still the subject of dispute.

Despite such discretion, Massachusetts’s legislators believe that the lack of formal anti-disclosure legislation will harm MassPRIM’s competitive position and, in turn, pension fund returns. Rubin, for example, says that the wheels began turning in Massachusetts after Sequoia Capital evicted the University of Michigan from a new fund due to past disclosures of fund performance.

Closer to home, MassPRIM was denied access into a new fund from Waltham, Mass.-based Charles River Ventures (CRV), with which MassPRIM had previously invested. Bill Tai, a general partner with CRV, acknowledges that his firm opted not to accept any more public money, but insists that the decision was driven more by fund size concerns than by disclosure concerns.

“We simply couldn’t accommodate every LP in what was a move toward a $250 million fund size versus a prior fund size of $1.2 billion,” he explains. Tai adds that he believes the proposed legislation in Massachusetts is a positive step, as public limited partners are currently viewed as more high-maintenance than their private peers.

CRV is MassPRIM’s only VC relationship that so far has been affected by the current disclosure debate, as other firms like Battery Ventures expect to maintain their involvement with public LPs. The pension system is, however, in the midst of a battle with five prospective hedge fund managers, who have expressed concern about prospective disclosures.

Wayne Smith, senior investment officer for alternative investments with MassPRIM, did not return a call seeking comment on this story.

Also not replying by deadline was the office of Mass. Governor Mitt Romney, who ultimately would be charged with signing the bill.

It is unknown whether or not Romney supports the current language, but his background as the former head of Bain Capital will make any decision open to speculation. If he signs a bill that restricts disclosure, it could look like he’s kowtowing to his friends in the private equity industry. If he goes the other way, political opponents may say that he is not looking out for the financial interests of Massachusetts pensioners.

Lawrence Aragon assisted in the reporting of this story.