Transparency is no longer exclusive to the public markets.
In a landmark decision, the board of the University of Texas Investment Management Co. (UTIMCO) on Wednesday 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, and 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. The new policy is the endgame of a three-year battle between UTIMCO and The Houston Chronicle over whether or not the Texas Freedom of Information Act applies to public university system investments. The newspaper was concerned that certain private equity firms were receiving fund commitments because individual firm partners were friendly with local politicians such as then Governor George W. Bush. For a while, UTIMCO agreed and provided select pieces of data, but then reversed course last October after an internal staff upheaval and advice to close the records by advisor Cambridge Associates.
The latest Houston Chronicle request for information came in late August, when a reporter asked for specific fund-by-fund ROI figures for the entire UTIMCO private equity portfolio. After being rebuffed numerous times, the reporter eventually wrote an article arguing that UTIMCO was “returning to secrecy.” After less than three weeks of deliberations – and with more than a few reservations — new UTIMCO chief Bob Boldt brought the possibility of “full and fair disclosure” up to a vote of the UTIMCO board. It passed unanimously.
;This is just a different world than it was last October when we closed the books,” Boldt says, referring to both corporate scandals like Enron and a hotly contested gubernatorial race in Texas. “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 (which is well over half of them), 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 explains. “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 says that he understands such concerns, and says that he 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 last Wednesday’s vote, or even in the following 24 hours.
When PE Week went calling UTIMCO portfolio funds, 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 says 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.
Among the firms in its VC portfolio are Advanced Technology Ventures, Ampersand Ventures, Atlas Venture, Austin Ventures, Baker Capital, Crescendo Venture Management, Foundation Capital, Morgenthaler Ventures and Essex-Woodlands Health Ventures. Included in the buyouts portfolio are Brentwood Associates, CVC Capital Partners, Leonard Green & Partners, TGF Management and Willis Stein & Partners.
None of those firms either returned calls or agreed to speak on the record about the situation. Of the ones that spoke on background, only one seemed unconcerned about the possibility that their performance could become public knowledge because he was confident in his firm’s IRR.
Also not returning calls by press time 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 will 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. He adds that firms like Cambridge Associates and [PE Week publisher] Venture Economics could be hurt because such third party research groups derive strong revenue from aggregate venture fund return data.
Another likely private equity industry gripe will be 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 says. “They can be harmful to your health if you pay attention to them.
As for when one of those warnings will be appearing in these pages, PE Week last Thursday put in a Texas Freedom of Information Act request on a handful of funds within the UTIMCO portfolio. Results will hopefully be coming soon – whether they are harmful or not.
Contact Dan Primack
|This is a free sample of content available to paid subscribers of Private Equity Week.
Click here for more information.