Limited Partner News –

Austin Ventures, the most prominent venture capital firm in Texas, closed its ninth fund without any Texas-based pension systems as limited partners. The fund raised $525 million. Fund VII had $830 million in LP commitments.

The decision to block out Texas LPs was prompted by increased concerns over the interpretation of Open Records laws by Texas AG Greg Abbott, whose office has previously confirmed that he supports the disclosure of underlying asset information, such as portfolio company valuations, revenue streams and other proprietary information.

“We’ve lived with the open records environment in Texas for years,” says Joe Aragona, general partner and co-founder of Austin Ventures, which has raised previous funds from such groups as the University of Texas Investment Management Co. (UTIMCO), the Teachers’ Retirement System of Texas (TRST) and the Houston Police Officers’ Pension System. “What we object to is how some open records bureaucrats in the attorney general’s office are changing their minds on how to interpret existing laws, and then making legislators come back and fix what the bureaucrats have just blown up.”

Because of the prominence of Austin Ventures, it’s feared that other Texas venture firms will follow suit. For instance, UTIMCO chief Bob Boldt told a legislative committee in Texas that his group has been shut out from follow-on commitments to funds from American Securities, Barclays Private Equity, Foundation Capital and Prospect Venture Partners, because of the state’s stance on disclosure. However, UTIMCO has been able to make three fund commitments so far in 2005, with Pomona Capital, Prism Ventures and OCM/GFI Power Opportunities Fund II, which follow late 2004 commitments to Union Square Ventures, The Carlyle Group and Doughty Hanson & Co.

Texas did not permit much disclosure of private equity fund information until late 2002, when John Cornyn-who was then attorney general and is now a U.S. senator-opined that UTIMCO must release top-line data for all of its general partners in the private equity and venture capital markets. He drew the line at underlying asset data, however, believing that such disclosure could unfairly harm fund performance by, among other things, violating portfolio company trade secrets.

Abbott issued similar opinions in his first days as Cornyn’s successor, but later changed his mind. He also ruled that TRST must abide to a newspaper request for certain underlying asset information related to a limited partnership interest in Texas Growth Fund. TRST and TGF are fighting that ruling in court.

Abbott then delivered a speech in which he said: “The people of Texas-whose retirement savings and pensions are directly affected by these investment decisions-deserve no less than to have the light shine on the investment of these dollars.” The speech, which came before the Freedom of Information Foundation of Texas in October, made Abbott the first attorney general in the nation to publicly declare his support for the disclosure of underlying asset information.

In his speech, he added, “There is no proof that secrecy will ensure good investments, but it is true that secrecy can conceal bad investments.”

Meanwhile, Texas State Rep. Dan Gattis (R-District 20) is sponsoring a House version of the bill. Gattis acknowledges that the current language does not come close to satisfying people like Aragona, who testified on the bill in front of a legislative committee in March. “We need to strike a delicate balance… because private equity [investment] is really the future for UTIMCO and others,” Gattis says. “The problem is that the VC boys want us to say everything but those 13 items are confidential, but we just can’t do that.”

Gattis supports a clause that would prevent disclosure of data that demonstrably harms fund performance, although the final decision, he says, still likely would rest with Abbott. Unlike Aragona, Gattis believes that Abbott’s disclosure position is malleable, and that a few VC-friendly public comments could go a long way.

None of that, however, will be soon enough for Austin Ventures. The firm closed without any public Texan institutions, although it accepted public LPs from states such as Washington, Virginia, Michigan, Massachusetts and California. Many of those states do provide for limited investment disclosure, but not of underlying data.

“I’m a Texan first, so this is very sad,” Aragona says. “But it’s necessary.”

– Dan Primack

CA Seeks Disclosure Limits

The concern over public pension disclosure is far from over in the Golden State, as California may soon enact a law to specify limits on private equity disclosures. The law, which was proposed in the California State Senate last week, would codify limits that the state has put on such disclosures through court decisions and legal agreements.

The bill was sent to the State Senate’s Judiciary Committee, which will hold hearings on the proposal on April 26. The assembly must then approve it, and the bill would require the governor’s signature before it is passed. At the earliest, the bill would go into effect next year.

State Sen. Joe Simitian introduced the legislation, citing concerns from the private equity community over possible future lawsuits stemming from California’s public disclosure laws and what he characterized as a misuse of those laws to gain competitive business advantage.

“I’m trying to balance legitimate competing interests between the public’s right to know and keeping proprietary information confidential,” says Simitian, whose senate district in Silicon Valley is home to much of the venture industry.

“At what point do you want to share information that undermines the competitive advantage to the very firms that providing returns to our pensions and endowments?” he says.

The disclosure issue in California has been the focal point of lawsuits, one of which involved The San Jose Mercury News and the California First Amendment Coalition. The suit set a standard in which some information such as management fees, returns and amounts invested in funds are disclosed, but detailed portfolio company information is kept confidential.

Proponents of the legislation say that the door is still open for future legal battles without a written law for guidance. “It provides us some assurance that we can access top tier funds without any question as to what will be disclosed in the future,” says California Public Employees’ Retirement System spokesman Brad Pacheco.

California’s efforts follow similar legislative action in Colorado, Massachusetts and Michigan. State pension funds in those states have found themselves not barred from funds raised by Charles River Ventures, Sequoia Capital and Woodside Fund. Similarly, Austin Ventures raised $525 million for its ninth fund, but did not accept any Texas-based public pension funds, due to the interpretations of public disclosure laws by the Texas attorney general.

– Matthew Sheahan

New Mexico Pensions Set to Invest in PE

New Mexico may soon chart its own course through the terrain of private equity investing. Both houses of the state’s legislature voted in March to allow its pensions to alter their asset allocation to include private equity investing.

Three state pension funds-the $6.7 billion New Mexico Educational Retirement Board, the $10 billion Public Employees Retirement Association and $12 billion State Investment Council (SIC)-will scrap more restrictive investment rules and instead invest in accordance with the Uniform Prudent Investor Act (UPIA), a law that regulates fund managers. This would allow the pensions to invest in areas of alternative assets previously prohibited, such as private equity. After the legislators passed the bill by a wide margin, it was sent to Gov. Bill Richardson, who was expected to sign it. The bill would take effect July 1.

“This will give us some flexibility to roll with the tides of the market,” says Charles Wollmann, a spokesman with the SIC. “There are some areas where we certainly would have invested more strongly in the past few years if we had the opportunity.”

New Mexico is the latest among a handful of few states that are just now allowing pension fund diversification into private equity. Earlier this year, Mississippi’s governor signed into law a bill that allows the $16 billion Public Employees Retirement System of Mississippi to invest in alternative assets. The New Jersey State Investment Council approved a plan to invest 13% of its $66 billion in assets into alternative investments. The plan would allocate 5%, or about $3.3 billion, of its assets to go to private equity.

New Mexico, meanwhile, has made a concerted effort in recent years to attract private equity, having set up the SIC, which has campaigned to invest in venture funds with a mandate of backing startups in New Mexico. The program has invested $148 million in venture funds, including most of the founding firms of the New Mexico Venture Capital Association. The firms have raised $953 million in the state through the program, which is managed by Cincinnati-based Fort Washington Capital Partners.

Founding members of the NMVCA include the Altira Group, Blue Sage Capital, Flywheel Ventures, Fort Washington Investment Advisors, ITU Ventures, Mesa Ventures, Red River Ventures, Vspring Capital and Wasatch Venture Fund.

– Matthew Sheahan

Land of Lincoln Is Local LP

Illinois began in March to invest its $50 million Technology Development Fund, citing a goal of creating jobs in the state. Illinois State Treasurer Judy Baar Topinka announced that three private equity firms from the Prairie State would share the fund’s first disbursement of $7.5 million.

The fund committed $3 million to Chicago-based Beecken Petty O’Keefe for its second fund. The firm specializes in buyouts and growth-stage private equity investments in health care companies. The firm invested 30% of its $150 million first fund in Illinois companies, according to the state treasurer’s office. Beecken Petty O’Keefe Fund is seeking $200 million for its second fund, according to regulatory filings.

Illinois allocated $3 million to M.K. Capital, a Skokie, Ill.-based venture firm that focuses on applied technology products and outsourced service companies.

The Illinois Emerging Technologies Fund (also known as IllinoisVENTURES) claimed the remaining $1.5 million for its early stage venture fund that spins companies out of the University of Illinois and other universities in the state. The treasurer’s office expects that nearly all of its investments will be made to Illinois-based companies.

The State of Illinois plans to commit between $15 million and $18 million to venture funds by the end of the year. It expects to invest its $50 million technology fund over three years, with between $30 million and about $38 million going to VC funds. The fund will likely invest in between 15 and 20 funds.

– Matthew Sheahan

Morgan Stanley Closes $500 FoF

The cliche around limited partner circles is that each and every investor will only commit to “the upper quartile performers.” This winners-repeat strategy has been tested and proven, but to think that nobody is investing in those firms that fall under the upper quartile would not only be incorrect, but foolish, too. Somebody is obviously committing to those funds; it’s just that nobody wants to admit it.

Morgan Stanley is going beyond the cliche. The firm recently capped off its second private equity fund-of-funds, having closed the Morgan Stanley AIP Global Diversified Fund LP. The firm, which sold off its direct-investing private equity arm last year, corralled $500 million for its second fund-of-funds, exceeding its $310 million, 2002 predecessor fund, and topping the $350 million target that had been originally mapped out for the vehicle.

“Upper quartile is not a must for us,” Morgan Stanley AIP Co-head Corey Pulfrey said. “You have to apply some judgment. Sure, there are studies that say performance persists, but we’re not looking for people in the top quartile from the past, we’re looking for the guys that will be there in the future.”

The fund’s blueprint calls for about 60% of the capital to go toward buyouts, while the balance will be split between venture capital and special situations. Also, more than half of the fund will be committed to international opportunities.

While Morgan Stanley is one of a slew of investment banks that cut ties with its direct private equity investment arms, the firm saw fit to hold onto its fund-of-funds operation.

– Kenneth MacFadyen

Survey: LPs To Up PE Allocations

A new survey of more than 1,000 public and private pensions, endowments and foundations by research firm Greenwich Associates found that private equity allocations have steadily increased over the past two years. Institutional investors’ average allocation to private equity increased from 3% in 2003 to 3.4% in 2004.

The survey also found that 30% of U.S. institutional investors plan to make “sizeable additions” to private equity. More than one-third of limited partners polled expressed interest in increasing hedge fund activity, as well.

– Matthew Sheahan

LP Briefs

* The Ontario Teachers’ Pension Plan has promoted Mark Wiseman to vice president of funds and investments. Since joining OTPP in 2002, Wiseman has been responsible for all direct and indirect private equity commitments.

* Stanley Mayromates was named CIO of the Massachusetts Pension Reserves Investment Management Board (MassPRIM), after having served in a deputy CIO role. He replaces Jerrold Mitchell, who announced his intention to retire late last year.

In other MassPRIM news, the system has named Cliffwater LLC as its new investment consultant, after having retained Wilshire Associates for the past two decades.

* California Gov. Arnold Schwarzen-egger has backed off his plan to overhaul the state’s pension system (at least for now). He had planned to put the issue on a ballot this fall, but on April 7 he said that he would wait until at least July 2006. In a formal statement, Rob Feckner, president of the California Public Employees’ Retirement System, applauded the decision.

* The Private Equity Industry Guidelines Group (PEIGG) has released its U.S. private equity reporting and performance measurement guidelines. They are available at www.peigg.org.