Michigan Changes Disclosure Law To Protect PE Data –

The second state in as many months has amended its open records law to prevent public institutions from disclosing certain private equity investment returns.

The move by the State of Michigan in May is tougher than the law passed by the State of Colorado in April. It comes more than a year after the University of Michigan released market values and internal rates of return (IRRs) for each of its 122 limited partnerships with venture capital and buyout firms. The university was the fourth major institutional investor to do so, following similar moves by the University of Texas Investment Management Co., the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS).

But the University of Michigan generated additional headlines when it was consequently booted out of a new Sequoia Capital fund and asked to sell its stakes in earlier Sequoia funds. Sequoia has declined to comment on the Michigan open records amendment or say whether or not it will invite University of Michigan back into its new fund because of the disclosure changes.

VCJ has learned that University of Michigan has not invested in Sequoia Capital XI. The university disclosed the information in response to a Freedom of Information Act request. The school had originally been accepted into the fund early last year, but was ejected after disclosing fund-specific performance data from within its venture capital and private equity investment portfolios. It had been an investor in six Sequoia offerings dating back to 1992.

To avoid similar situations going forward, the university convinced Michigan legislators to pass Senate Bill No. 1032, which otherwise is known as the “Confidential Research and Investment Information Act.” It was signed into law by Gov. Jennifer Granholm on April 22 and prohibits the University of Michigan from disclosing any private equity portfolio information except for fund names, aggregate amounts of investment and aggregate rates of realized returns.

Cynthia Willets, vice president of government affairs for the University of Michigan, says that the legislation simply extends an open-records exemption that already existed for state pension funds. When asked if the public should be concerned about not having access to individual fund data-particularly if the school repeatedly invests in under-performing funds-she insisted that the University of Michigan takes its stewardship of school assets very seriously.

“The top value of those watching over the endowment and other assets is to grow those assets,” Willets says. “We also provide lots of information in annual reports and monthly board meetings, and the legislators and local press thought that this bill was reasonable.”

Indeed, the Michigan Press Association did not voice its objection to Bill 1032, although it did first insist on adding the language about fund names and aggregate performance data. This stands in stark contrast to successful media efforts in both California and Texas to obtain fund-by-fund performance data. The San Jose Mercury News, for example, sued both CalPERS and the University of California (UC), to obtain the numbers. CalPERS settled with the paper, and UC lost a Superior Court verdict. The Mercury News also was the first newspaper known to have requested University of Michigan’s data under the state’s open records laws.

Matt Marshall, a business reporter with the Mercury News who initially requested the documents of all three institutions, declined comment.

Michigan’s decision represents the second time this year that a state government has enacted legislation that restricts open record requests for state investment information.

Last month, the State of Colorado passed a bill that prevents the release of underlying asset data (such as trade secrets and financial reports of VC firm portfolio companies). The law still permits private equity fund performance data to be disclosed by public LPs.

Willets was unaware of the Colorado compromise, as was Michigan State Sen. Valde Garcia (R-District 22), who was the lead sponsor of the bill. Garcia says that the Michigan bill was primarily drafted to protect the state’s life sciences initiatives, because open records laws could reveal trade secrets from private companies that teamed up with University of Michigan researchers or labs.

Garcia added that if constituents were concerned about a lack of investment transparency that he would consider amending the legislation.

Email: daniel.primack@thomson.com