The University of California (UC) took its fight over private equity disclosure to the California Court of Appeal in San Francisco in September, but it was unlikely that the dispute would be resolved by October.
UC failed in an earlier bid to convince a superior court judge to reconsider his ruling that would force UC to publicize internal rates of return for its investments in private equity funds. That led it to file an appeal on Sept. 5.
UC’s opponents in the case – the San Jose Mercury News, Coalition of University Employees and university professor Charles Schwartz – had until Sept. 18 to file an opposing brief. It was then up to the appeals court to decide by Sept. 30 if it would hear the case.
Even if the court refused to hear the case, UC would continue to appeal, says Steven Mayer, an attorney with San Francisco law firm Howard, Rice, which represents UC. “I would not be surprised if either side appeals, whatever the next step is,” Mayer says. “This case has serious financial implications for the university.”
In his original ruling against UC, Alameda County Superior Court Judge James Richman made note that he hadn’t seen any evidence that public investors would be kicked out of top-performing PE funds because they had disclosed IRRs. However, Sequoia Capital removed the University of Michigan from its most recent fund one day prior to the judge’s ruling, and it removed UC from the same fund just one day before the judge declined to reconsider his initial ruling. In a letter to the University of Michigan, Sequoia Partner Mike Moritz cited concerns about disclosure of confidential information as the reason for Sequoia’s decision.
Billions at Stake
Based on statements made in its appeal, UC has a lot to lose if the superior court ruling holds up. Since the start of its private equity investment program, it has “received distributions of $2.2 billion on venture capital investments of $650 million,” the Sept. 5 court filing states. It goes on to say that UC’s PE investments have outperformed any other portion of the university’s investment portfolio. For the 10 years ended on Dec. 31, 2002, UC’s PE investments earned an annual return of 28.8% and its VC portfolio earned an annual return of 42.9%, in contrast to a return of 8.3% annual return on its public equities, according to the court filing.
The brief also argues that because of its “long-term participation in the private equity market, UC has access to top-tier’ partnerships – i.e., the best performing and the most sought after partnerships – that is unique among public funds.
“For example, CalPERS’s annual return from private equity investments over the past 10 years has been 10.6%. This compares unfavorably to UC’s return on private equity over the same period of 28.8% and its return on venture capital of 42.9% annually. Indeed, the 10-year 42.9% return for the University of California Retirement Plan’s (UCRP’s’) venture capital portfolio is 15% to 20% greater than the performance of two comparable indices: the Cambridge Associates Venture Index, with an annual return of 27.9%, and the Venture Economics Venture Index, with an annual return of 22.3%.”
UC claims that the strong performance of its private equity investments is one of the reasons why it has stayed fiscally healthy.
Better than the Rest
“In contrast to most other public pension plans, the assets of the UCRP exceed its liabilities,” the court filing states. “Indeed, the UCRP ranked sixth out of 123 state retirement systems as of the end of the last calendar year.”
UC was informed by Sequoia that it was being kicked out of Sequoia Capital XI on Aug. 27, one day before Judge Richman opted not to reconsider an earlier ruling against UC. He did not issue a written rationale in denying UC’s motion for reconsideration.
The judge had originally ruled on July 24 that the school must release performance data on all 94 of its private equity fund investments, following requests from the Mercury News and others. The motion for reconsideration had been filed just days later.
In his original ruling the judge wrote: “The record as a whole demonstrates that other public pension plans have produced IRR information without the dire consequences predicted by [UC] – indeed, that perhaps the dire predictions are false… Particularly persuasive is the evidence about Sequoia, admittedly a top venture fund, which recently accepted an $8 million investment from the University of Michigan, after that University publicly released IRR information.”
It turned out that Sequoia kicked out Michigan on the very day of Richman’s initial ruling.
Mayer is optimistic about UC’s chances to win on appeal, particularly since the university system has been removed from Sequoia’s fund – the very thing that it argued would happen. “It helps our case, but it doesn’t help the university,” Mayer says. “Sequoia’s decision typifies what we fear will be the norm: that public investors won’t be admitted into the most desirable funds because those funds can pick and choose among investors, and they won’t choose those that disclose information that they want to remain private.”
In a letter sent to the University of Michigan on July 24, Sequoia’s Moritz wrote that Sequoia’s GPs “have the right to protect our other clients, our portfolio companies and ourselves from the various damages that can result from the dissemination of information we consider highly confidential. We intend to remain as accountable to our clients as we have been in the past. But we do not believe their interests will be served by regular disclosure of sensitive confidential information that can be misleading or subject to grotesque misrepresentation. The venture capital business – unlike other segments of the investment universe such as publicly traded stocks or bonds – does not lend itself to precise quarterly measurements.”
Additional reporting by Carolina Braunschweig.