Private Markets Shoved Into The Light Transparency is no longer exclusive to the public markets –

In a landmark decision, the board of the University of Texas Investment Management Co. (UTIMCO) last month voted unanimously to disclose all financial information related to both its public and private investment portfolios. The move was largely prompted by a budding public relations crisis surrounding UTIMCO, but could lead to the disclosure of performance figures for many of the nation’s leading venture capital and buyout shops.

“I’m shocked by this decision, just shocked,” said one chief financial officer of a venture capital firm that counts UTIMCO as a limited partner. “I know we have confidentiality language in our limited partnership agreement, so I don’t really see how they could be getting away with this.”

Very easily, actually. UTIMCO’s new policy is the end of a three-year battle between the investment company and the Houston Chronicle over whether the Texas Freedom of Information Act applies to public university system investments. The newspaper had questioned whether certain private equity firms had received fund commitments because individual firm partners were friendly with local politicians, such as then-Governor George W. Bush. For a while, UTIMCO cooperated with the Chronicle’s investigative pieces by providing select pieces of data about its portfolio, but it reversed course a year ago after an internal staff upheaval. Its adviser, Cambridge Associates, also urged UTIMCO to close its records.

Yet, in an environment poisoned by corporate scandal revelations and the hotly contested Texas gubernatorial race, UTIMCO was no longer able to keep such information under wraps. The endgame came when a Chronicle reporter wrote an article arguing that UTIMCO was “returning to secrecy” after the company rebuffed a reporter’s requests for specific fund-by-fund return on investment (ROI) figures. This set off a PR tempest for UTIMCO, whose board, after less than three weeks of deliberations, voted to offer “full and fair disclosure” of its records to the public.

“This is just a different world than it was last October when we closed the books,” said new UTIMCO head Bob Boldt. “With the greater interest in disclosure, now just isn’t the time to be withholding information and opening ourselves up to accusations of acting like the bad boys of corporate America.”

The new policy is two-fold. First, UTIMCO will no longer invest with private equity funds that insist on including privacy provisions in the partnership agreements. As for existing investments, UTIMCO is now willing to provide a variety of information including ROI for those funds whose partnership agreements did not include non-disclosure clauses. For the more than half of its portfolio funds that did include such language, UTIMCO will request a waiver from the general partnership. If denied, UTIMCO will turn the issue over to the Texas Attorney General’s Office.

“The confidentiality agreements say that the LP agrees to not disclose certain information unless required to do so by a government body,” Boldt explained. “In order for a GP to be exempted from the Texas Freedom of Information Act, it must prove to the attorney general that disclosure of fund returns would significantly disadvantage them in the [investment market].”

When apprised that the burden of proof in such cases would fall on the general partnerships, many investors expressed dismay that their hands may be tied. “I certainly don’t want our returns going public,” said one market veteran. “But I also don’t want to be part of a firm that goes around suing its LPs.”

Boldt said that he understands such concerns, and even argued against certain parts of the revised policy at board meetings. One thing he didn’t do, however, is contact all of his GPs before the final vote, or even in the following 24 hours.

When Buyouts sister publication Private Equity Week called UTIMCO portfolio funds the day after the UTIMCO vote, only one of six respondents claimed to even know that such disclosures were being discussed. Boldt responded by saying that because the entire process lasted just three weeks, he had not yet had time to discuss the issue with all of his GPs. He also said that he did consult certain investors and that he would talk with everyone in the upcoming weeks.

UTIMCO aims to have approximately 15% of its $12 billion cache invested in private equity, which works out to $1.8 billion. Of that, 25% is invested in venture capital with the rest going to buyouts, mezzanine and certain private equity real estate funds.

The UTIMCO private equity portfolio includes such buyout firms as Brentwood Associates, CVC Capital Partners, Leonard Green & Partners, Morgenthaler, TGF Management and Willis Stein & Partners. Within its venture capital portfolio are Advanced Technology Ventures, Ampersand Ventures, Atlas Venture, Austin Ventures, Baker Capital, Crescendo Venture Management, Foundation Capital and Essex-Woodlands Health Ventures.

None of those firms either returned calls or agreed to speak on the record about the situation. Of the firms that spoke on background, only one seemed unconcerned about the possibility that its performance could become public knowledge because the source was confident in his firm’s IRR.

Also not commenting was the National Venture Capital Association, which has never been a big advocate for private market transparency. One source familiar with the trade group said that it would probably view the UTIMCO move as “subversive to the health of venture capital” because it could persuade certain firms to only accept fund commitments from non-public sources.

Another likely gripe from players in the private equity industry is that the return information is meaningless because each firm uses different accounting metrics. Boldt also believes this is the biggest problem with his board’s decision, and hopes that press reports remember that private equity performance figures can be misleading due to such issues as the J-curve. This was a also a concern of the California Public Employees’ Retirement System (CalPERS), which once experimented with putting GP performance data online, but has suspended the practice until it can create a standardized accounting system.

“I hope that when people write about these numbers, they include some sort of warning like is on cigarette packages,” Boldt said. “They can be harmful to your health if you pay attention to them.”