The battle over private equity market transparency moved west last week, when The Mercury News sued the California Public Employees’ Retirement System (CalPERS) for refusing to release detailed private equity investment records. The complaint was filed in San Francisco Superior Court as a writ of mandate under the California Public Records Act, and a first hearing is tentatively scheduled for November 6.
;We are strong advocates for citizens and transparency in government,” explains David Yarnold, executive editor and senior vice president of The Mercury News. “This particular issue seems so egregious that somebody has to take a stand.
The issue, of course, is whether or not public institutions like CalPERS should be required to report internal rates of return (IRR) for each of its private equity fund investments. Transparency advocates like Yarnold argue that the public has a right to know exactly how its money is being invested, while opponents insist that such disclosure will ultimately harm pensioners by turning CalPERS into a private equity pariah.
;If I had to choose between two investors [one of which required greater disclosure than the other], I would go with the people that don’t have disclosure requirements,” says David Spreng, a managing partner with Crescendo Ventures. .
If this debate sounds familiar, that’s because it is. Last month, the University of Texas Investment Management Co. (UTIMCO) ended a yearlong battle with the Houston Chronicle by finally agreeing to turn over its fund-by-fund performance data (See PE Week 10/13, pg. 1). While the particulars of the UTIMCO and CalPERS situations are slightly different, lawyers for The Mercury News cited UTIMCO in court papers: “UTIMCO’s decision puts the lie to CalPERS’ claim that venture firms would reject CalPERS as an investor if it released IRR results.
Whether or not the UTIMCO example proves anything, however, is still yet to be seen. None of the firms in its portfolio have raised new funds since the move, and UTIMCO CEO Bob Boldt is concerned enough about the repercussions that he is in the middle of a two-week trip during which he’ll try explaining his position to all of UTIMCO’s general partners. Instead of admitting he’d jumped the gun, Karl Olsen, an attorney representing The Mercury News, instead left the matter up for interpretation by saying, “It’s highly speculative for CalPERS or anyone else to say people are not going to want to do business with them if they release this information.” He later amended that statement by labeling such thinking “ludicrous.
What is even more interesting about Olsen’s thinking is that he is not concerned even if CalPERS is denied such business. “Even if it were true that [CalPERS] might be denied access to some funds as a result of having to comply with the Public Records Act, I’d say it would be the cost of being a public agency.” He added that he does not believe that the California statue includes an exemption like the one in Texas that permits the state to withhold information whose release would demonstrably damage existing investments. No other qualified attorneys could be contacted by press time, although PE Week did find a clause in the California law exempting “information received in confidence by any state agency.”
Won’t Get Fooled Again
The Mercury News lawsuit represents the second major transparency mess for CalPERS, a $100 billion pension system that in recent years has become the 500-pound gorilla of private equity fund investing.
The original incident occurred last year, when CalPERS posted, and then pulled, internal rates of return for most of the venture capital and buyouts funds in the CalPERS portfolio. A source close to the situation says the posting was accidental, and that the problem only occurred when the press recognized the mistake before CalPERS. The organization’s official stance was that the removal was a temporary measure taken while it designed some standardized performance metrics, while others like the Mercury News think the flip-flop was caused by general partner embarrassment over some unpleasant results.
;On the whole, IRRs are just a snapshot in time,” says Stephanie Manuel, marketing and communications partner with ABS Capital Partners, which counts CalPERS among its LPs. “Everyone in this needs to find the middle ground, because you have a history of public institutions like CalPERS being required to disclose information and a history of the private markets being private.
Manuel added that a larger concern to GPs than the IRR disclosure would be if groups like CalPERS decided to release underlying asset information, such as portfolio company valuations. Olsen says that The Mercury News lawsuit is not asking for such data, although the newspaper’s David Yarnold said that such a request was not inconceivable. “When private companies take on public investments, they also take on certain responsibilities.
Neither CalPERS nor Grove Street Advisors, which consults on a significant percentage of CalPERS’ venture capital investments, returned calls requesting comment on this story.