The battle over private equity market transparency moves west on Wednesday, when a San Francisco Superior Court judge will hold a preliminary hearing on a recent lawsuit brought by The San Jose Mercury News against the California Public Employees’ Retirement System (CalPERS). The complaint argues that CalPERS has violated the California Public Records Act by refusing to release detailed private equity investment records.
“We are strong advocates for citizens and transparency in government,” explained 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.
“This is a black and white issue in which [the Mercury News] is completely wrong,” said a source familiar with the situation. “CalPERS used to be one of the public pension funds no one wanted to deal with, and they run the risk of once again becoming persona non grata if the court rules against them.”
David Spreng, a managing partner with Crescendo Ventures, added: “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.”
While the outcome of the CalPERS situation has consequences that could potentially affect private equity as a whole, several buyout funds will feel the impact of the decision quickly and directly. Among the buyout funds listed in the CalPERS portfolio are Alta Communications, Apollo Management, Blackstone Group, Carlyle Group, Leonard Green & Partners, Madison Dearborn, Soros Private Equity and Thomas Weisel Capital.
The Debate Continues
If this disclosure debate sounds familiar, that’s because it is. In September, 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 Buyouts 9/14/02). While the particulars of the UTIMCO and CalPERS situations are slightly different, lawyers for The Mercury News cited UTIMCO in supplemental 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 planned a two-week trip for the purpose of explaining his position to all of UTIMCO’s general partners. Instead of admitting the court papers jumped the gun on this matter, 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’s 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 doesn’t believe 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 there is a clause in the California law exempting “information received in confidence by any state agency.”
A CalPERS spokesman declined to comment on the suit, except to say that the group is trying its best to balance its fiduciary duties to its members with its participation as an investor in the private equity market.
Won’t Get Fooled Again
The Mercury News lawsuit represents the second time around the transparency block 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 said the posting was accidental, and that the problem occurred only 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-including 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,” said 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 adds 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 said that The Mercury News lawsuit is not asking for such data, although the newspaper’s David Yarnold said such a request was not inconceivable. “When private companies take on public investments, they also take on certain responsibilities,” Yarnold said.
CalPERS had hoped to get an extension on Wednesday’s hearing until after its Nov. 18 investment committee and Nov. 20 full board meetings, but was unsuccessful. Nonetheless, CalPERS and its affiliates did recently manage to file a 600-page-plus response to The Mercury News suit, buttressed by dozens of supporting letters from industry players.