Battle Over Preventing Disclosure Data Shifts To the East Coast

In Massachusetts, a bill is working its way through a legislative conference committee that, if passed, would make the Bay State the next new battleground to prevent the disclosure of venture capital investment activities.

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 and to maintain existing relationships for subsequent fund offerings.

What remains fuzzy, 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, 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.

“I’d rather see Massachusetts start with a more conservative approach, and then agree to work with general partners in coming up with the right disclosure guidelines,” says Dana Callow, managing general partner of Boston Millennia Partners, which does not currently count MassPRIM as a limited partner. “We are not a group that says, No information’ is best, but we’re also a group that has had to limit some of what we report because of… possible FOIA requests, and because the SEC has requested the disclosure of a lot of information from [pension fund consultants].”

On the surface, it would seem that the Massachusetts Treasurer Tim Cahill would be in agreement with Callow’s conservative approach. Cahill has spent over a year refusing FOIA requests for fund-specific data from MassPRIM’s VC portfolio, despite a standing order from State Attorney General Tom Reilly that such records be released. Part of this stalemate had initially been blamed on James Hearty, the longtime MassPRIM executive director who Cahill fired last August. Hearty’s unwillingness to release VC performance data reportedly had helped lead to his ouster, but – nearly one year later-it seems that such talk was little more than a red herring.

Doug Rubin, first deputy treasurer under Cahill, acknowledges that his office has yet to respond affirmatively to such fund-specific FOIA requests, but insists that such disclosure will be forthcoming. He says that MassPRIM currently is deciding how to best release IRR information from its “Venture Capital and Special Equity Partnerships” portfolio, and that Cahill prefers that the pending legislation is more reminiscent of Colorado’s plan than of Michigan’s.

“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.”

Wayne Smith, senior investment officer for alternative investments with MassPRIM, did not return messages left for comment on this story.

VCJ received a similar response from Massachusetts Governor Mitt Romney, but it is hardly alone. Romney also has not yet given a formal opinion on the legislative language to conference committee members, and sources say that his former job as head of Bain Capital could make the decision politically uncomfortable.

If Romney chooses to sign the bill, it could look as if he’s kowtowing to his former private equity colleagues. If he lets the bill sit, political opponents may suggest that Romney isn’t adequately looking out for the financial interests of Massachusetts’s pensioners.

Why Now?

One potential out for Romney could be to correctly point out that Massachusetts does not currently need to protect its VC performance data. This runs counter to current disclosure hysteria, but is supported by some fairly compelling facts.

First, MassPRIM only has “lost” one VC partnership due to its status as a public limited partner. That would be Waltham, Mass.-based Charles River Ventures (CRV), a longtime MassPRIM money manager that decided against accepting any public money on a $250 million fund closed in February. Bill Tai, a general partner with CRV, says that while he applauds the potential Massachusetts legislation, he doesn’t feel that it would have changed his firm’s decision. “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,” Tai explains.

A handful of other veteran firms also have refused public monies, but only Sequoia has done so explicitly because of disclosure concerns. Sequoia evicted the University of Michigan, prompting that state’s legislation.

Waltham, Mass.-based Greylock, though, has never accepted a dime of public funding, and is unlikely to change unless it has trouble raising private capital. In other words, disclosure is not significantly hampering MassPRIM’s ability to make money.

For evidence, one only need look at the California Public Employees’ Retirement System (CalPERS), which serves as the nation’s largest public pension and largest single investor of venture capital. CalPERS has published portfolio fund IRRs and disbursement data on its Web site for over a year, but has had little trouble placing its massive allocation.

“It’s really had a very minimal impact,” says Leon Shahinian, senior portfolio manager of alternative investments with CalPERS. “All our general partners are OK with what we do so long as we don’t release portfolio-level information, and the policy in place right now does not allow that to happen.”

Concern over underlying asset disclosure is a common theme voiced by VCs, and understandably was repeated by Rubin, Massachusetts’ first deputy treasurer. The reality, however, is that underlying asset disclosure is, to date, an imagined threat.

MassPRIM has received top-line FOIA letters from The Boston Globe, Mark O’Hare of Private Equity Intelligence (a private equity performance database provider), and a private individual named Mark Wiener, but has never received any requests for portfolio-level information. A local pension fund in Massachusetts does claim to have received one such inquiry, although its author insists that fund managers misunderstood his intent. The matter remains in dispute, although the current legislative language wouldn’t cover non-MassPRIM systems anyway.

Perhaps it is for this reason that CalPERS has not asked state legislators to file a bill similar to either Colorado or Michigan. Sources say that Gov. Arnold Schwarzenegger’s administration briefly flirted with the idea late last year.

A similar disinterest in disclosure legislation is present in Texas, where the University of Texas Investment Management Co. (UTIMCO) is known as the first public LP to formally disclose portfolio fund IRRs. Bob Boldt, chief executive of UTIMCO and a onetime equities manager for CalPERS, says that he has heard no legislative rumblings, nor would UTIMCO begin any.

“Legislators in [Massachusetts, Colorado and Michigan] are looking at it from a public policy point of view, and that can be important,” Boldt says. “We always have to watch these things because Texas has the second-largest number of VC-created jobs in the U.S., but right now we are comfortable with our position… We haven’t been through a full funding cycle yet, so the only definitive thing I can say about disclosure’s impact on UTIMCO is that we now know that we can’t get into a few platinum funds that we might not have been able to get into anyway.”

Email: daniel.primack@thomson.com