Hurricane FOIA Slams Public Pension Funds –

It has spread all the way from Massachusetts to Alaska and has hit Illinois, Texas and California in between. It’s not a natural disaster, but some venture capitalists say it has all the makings of a financial calamity.

The “it” in question is the request under the Freedom of Information Act (FOIA) for public agencies to release private equity performance figures. The requests vary from return information to entire partnership agreements and details on the portfolio companies in which the funds have invested.

Thus far, Texas has been the only state to comply with such a request. The University of Texas Investment Management Co. (UTIMCO) in September released fund-by-fund performance of its venture capital investments (see November VCJ). Whether others follow suit, and whether states can be forced to release return information and more will be decided in court.

The only case in the court involves the California Public Employees’ Retirement System, which is being sued by the San Jose Mercury News newspaper to release return data (see “All Eyes on CalPERS Suit, page 6). A judge was scheduled to hear the case on Nov. 14, but a decision was unavailable before VCJ went to press.

The outcome of any legal case is far from certain, but what is certain is that more of these requests will be made, and not just of state pension funds. Yale University, for example, is being pressed to disclose its private equity holdings and performance.

The essence of any legal battle will be whether a particular state’s FOIA law trumps the non-disclosure agreements signed by the public pension funds when they invested in VC funds.

Most state FOIA laws mirror the federal FOIA in the way they are constructed, says Richard Moorhouse, government contracts partner in the Washington, D.C., office of Reed Smith. At its most basic level, FOIA was constructed to provide a legal avenue for the release of public documents. But that doesn’t mean everything within those public documents will necessarily be made public. FOIA has a series of exemptions, the most critical of which for VCs is an exemption that allows them to not disclose any information they deem to be proprietary. They would need to show that the release of the information would harm the firm because it benefits competitors or that it would reveal a trade secret.

Court cases will make clear what is proprietary and what is public, and the answers will vary from state to state. Texas is known as a state that hews closely to FOIA law. As a result, it offered up the private equity return data held by UTIMCO to the general public.

Over the past several years Wisconsin has fended off at least half a dozen FOIA requests for private equity data based on its reading of the law. Alaska has a reputation as a state that is not inclined to release data, and it’s anyone’s guess what will happen in California and Massachusetts.

“If it is public money and it is invested in private equity, the requestor could have an argument that at least some of that information should be disclosed,” says Moorhouse. “For crying out loud, it’s public money and public pensions-there should be some transparency.”

For VCs and public pension funds the stakes are significant. While they grumble about it, most VCs do not seem inclined to wage a battle to prevent the release of fund returns. But if third parties request more detailed information there is likely to be a war. Releasing partnership agreements means revealing data on the other limited partners invested in a fund. Many of these are private LPs that want to keep everything about their dealings secret, even the fact they invested in a fund. Revealing information about valuations and business models of private portfolio companies is what VCs fear the most. Most argue such disclosure would damage their companies and, in turn, the prospects for their funds.

If they release data, public pension funds need to consider the very real threat that they will be frozen out of top-tier VCs funds at a minimum, says Stanford Law and Business Prof. Joe Grundfest. “It’s not just venture capital,” he says. “It’s the ability of any of these state institutions to enter into a legally binding contract that they will not disclose information on any private equity investment. That means LBOs, real estate, timber and oil and gas. It may well be that they will now be carved out of all of that.”

Depending on the outcome of the pending FOIA requests, and the legal case in California, VCs will need to decide whether they want to do business going forward with public pension funds on a state-by-state basis.

Carl Metzger, a partner in the Boston office of Testa, Hurwitz & Thibeault, has a number of venture firms as clients that are involved with FOIA requests around the country. “LPs do need access to a fair amount of info about their fund investments,” he says. “The challenge here is to make sure that LPs-including public entity LPs-get that information, and at the same time making sure that confidential, proprietary information doesn’t end up in the hand of third parties that have no business getting it.”

One solution is to have varying levels of information available to LPs, Metzger says. Those whose non-disclosure agreements are airtight would get the most, while public entities would get less.

Exactly who is making these requests is also important. Some of the requests, especially for information beyond returns, are being made by individuals or companies looking to resell the data.

One such person may be Mark O’Hare, a California resident who has filed three requests in Wisconsin, and at least one in Illinois, according to officials in those states. O’Hare declined to reveal the number or names of states in which he has filed FOIA requests. He also declined to say what he plans to do with the information except to say he is starting a “private equity intelligence” company.

The experience of Washington State, which has released its private equity returns data for the last 20 years, supports the notion that it is primarily people in the private equity data business who are asking for this information.

“I think that most of the people that want this information are not my retirees,” says Gary Bruebaker, chief investment officer at the Washington State Investment Board. “I think it’s the press, it’s competitors, it is people building databases to sell information back to us. But I don’t get requests from my members. They just want to know how their funds are doing.”

Washington State, like Texas, is an “open records” state. In general terms, Bruebaker releases information as long is it doesn’t result in a loss to the state fund. To that end, Washington State will release fund performance figures of any of the 58 VC firms it does business with, including Accel Partners, Battery Ventures, El Dorado Ventures, Menlo Ventures and Oak Investment Partners.

It does not go into detail beyond that.

If he had his druthers, Bruebaker would rather not disclose any of it. “Has it harmed us? It’s absolutely harmed us for 20 years,” he says. “There are private equity firms-both venture capital and LBOs-that will not do business with funds that release information. To the extent that I don’t have a whole universe of firms to pick from, I’m harmed.”

And he thinks his universe may get even smaller because of all the attention the issue of private equity disclosure is getting around the country.

“All the publicity we are getting may hurt us even more going forward,” Bruebaker says. “I am not sure private equity firms paid as much attention to [our laws] before as they will now.”