The world at large may soon have access to internal rates of return for the 250 private equity funds in the California Public Employees’ Retirement System’s (CalPERS’) $20 billion private equity portfolio, a San Francisco Superior Court judge tentatively ruled in November.
In an open records suit filed by the San Jose Mercury News against CalPERS, the nation’s largest public pension fund, Judge James Robertson tentatively ruled that IRRs do not constitute a trade secret and should be made available for public consumption. Any underlying fund performance data, including the identity and value of every company in a fund’s portfolio, is competitive information that should remain confidential, the judge said at the hearing. He will make a final decision on both matters Jan. 30.
Prior to the November hearing, 14 venture capitalists from around the country filed letters to the court asking it to keep IRR data private.
While several of CalPERS’ GPs said at press time that it was too soon to determine whether or not they would contest the IRR ruling, an attorney representing several of CalPERS’ GPs said that some of his clients were adamant about not having their IRR information released. “Most of them are more concerned about portfolio company information being published, but some will likely file declarations that IRRs are trade secrets,” he said.
GPs may argue that the IRR is the result of trade secret-protected accounting methodology and, as such, cannot be disclosed. Likewise, GPs could say that the IRR is essentially an aggregate figure of private company valuations, which are protected as trade secrets.
While Judge Robertson said that portfolio company valuations are a trade secret, he told CalPERS’ attorneys that a GP must certify that it has only disclosed the valuation of each portfolio company to its limited partners and to other parties subject to confidentiality agreements. If the GP cannot certify that a portfolio company’s valuation has been kept secret, then the Mercury News can ask for that information. The newspaper would have to submit arguments to a referee, who would give his recommendation to Judge Robertson for a decision on Jan. 30.
Karl Olsen, a lawyer for the Mercury News, argued at November’s hearing that recent open disclosure agreements by institutional investors like The University of Texas Investment Management Co. make sure IRR secrecy is a moot point. “The horse is out of the barn [on IRRs],” he told the court.
The newspaper had argued in an October pleading that CalPERS should be compelled by the California Public Records Act to release fund-by-fund performance data. Once in court, the Mercury News asked to see underlying asset data from CalPERS’ general partners, such as portfolio company valuations from the funds in which CalPERS invests.
Rather than slamming the door completely, the judge said that CalPERS’ GPs who disagree with his finding have until Dec. 9 to file a declaration with the court explaining why fund IRRs should be considered trade secrets.
If the Mercury News contests the declarations, a referee will be assigned to make a recommendation to the judge prior to Jan. 30.
CalPERS once posted its own evaluation of private equity fund performance on its Web site. The evaluation stated whether CalPERS believed a fund was performing well or under performing, but it did not post IRRs. Judge Robertson tentatively ruled that CalPERS’ past evaluation of fund performance did not constitute a trade secret, since its performance evaluation was qualitative rather than quantitative.
CalPERS may argue that such disclosure will make it an unattractive investment partner, effectively shutting it out of lucrative investment opportunities in the future. It has until Dec. 9 to submit those arguments to the court. The Mercury News has until Dec. 19 to file a counterargument. Judge Robertson will make a decision on the matter on Jan. 30.