Will Colorado Set Trend with Disclosure Limits? –

In an effort to mollify general partners who exclude public LPs when raising a new fund, Colorado has passed a law that aims to protect portfolio company valuations from being disclosed.

Whether Colorado’s action will be followed by more states is unclear. There was an effort to pass similar legislation in Florida but it never made it to the governor’s desk. At the very least, it will make Colorado more appealing to venture funds worried about a public LP being forced to disclose information about the private companies that its GPs have invested in.

“By making it clear that the portfolio company data is protected, it’s going to improve the ability of Colorado to gain access to the more exclusive funds,” says Clinton Harris, managing general partner of Grove Street Advisors, a fund-of-funds in Wellesley, Mass.

Colorado’s law should help state entities compete for space in increasingly smaller venture funds. In some cases, private LPs, like university endowments, have tried to increase their own allocations at the expense of public LPs, by raising concerns among GPs about the risk of taking money from someone beholden to the Freedom of Information Act (FOIA) or other disclosure laws.


“In the current environment, the investors that do not have a FOIA risk are using that issue as a way to increase their share of the pie at the expense of the state pension funds and other investors with FOIA risk,” says a veteran fund-raiser.

Sarah Rothermel, who heads up the private equity group of the Boston law firm Hale & Dorr, says the jury is still out as to how big an impact Colorado’s law will have. “Colorado is trying to make its state public pension investors more attractive to top-tier VC funds, but venture firms and their investors will only find this legislation a good development if other states pick up on this,” Rothermel says.

Specifically, the Colorado bill – which is scheduled to go into effect on July 1- forbids the state’s treasurer and public pension funds from disclosing any information regarding the value of a private equity investment. Colorado Gov. Bill Owens signed the bill into law on April 1.

What will remain available for public consumption in Colorado is the amount of capital an investor, such as the Colorado Public Employees’ Retirement System (CoPERA), commits to a fund, the distributions it has received and internal rates of return of the various funds it has invested in. CoPERA – which testified in support of the Colorado bill – as well as CalPERS, the University of Michigan, the University of California (UC), and other public investors already publish such information on their Web sites.

For Every Action…

Colorado appears to be reacting to moves by at least three venture firms that have kicked out or excluded public LPs – Charles River Ventures (CRV), Sequoia Capital and Woodside Fund.

Waltham, Mass.-based CRV held a final close on its 12th fund earlier this year without including any public institutional investors. Past public backers who didn’t get into CRV’s $250 million fund include the City of Lowell, Mass., the Rhode Island State Treasury, and the Massachusetts Pension Reserve Investment Management Board.

While CRV excluded public LPs in raising a new fund, Menlo Park, Calif.-based Sequoia initially allowed two universities that were longtime LPs – the University of Michigan and the University of California – to come into its 11th fund only to kick them out later. After it closed on the $395 million fund, Sequoia sent the universities eviction notices citing disclosure concerns.

The latest venture fund to keep public LPs out of its new fund is Redwood Shores, Calif.-based Woodside, which closed on its fifth fund in March. Woodside co-founder Vincent Occhipanti says the absence of public pension money in the $146 million fund reflects partners’ concerns about disclosure.

And although the partners at Kleiner Perkins Caufield & Byers have declined to say if they will allow longtime public LPs like UC into their latest fund, UC’s odds don’t look good. A source close to the university says UC was exploring ways to try to get around FOIA, but it didn’t look like the school would pursue such a strategy as of early April.

For some venture firms the general performance data made public by FOIA isn’t a real concern. OVP Venture Partners doesn’t have an issue with LPs reporting its cash-on-cash performance, which the Oregon Public Employees Retirement Fund has done for years, says Gerry Langeler, a partner in OVP’s office in Portland, Ore.

But, Langeler adds, he would feel better if others followed Colorado’s lead to make it explicit that underlying portfolio company valuations are off limits. “If more states such as Colorado put in place statutes to limit what portfolio company details could be made public, then that removes one of the main issues many venture firms have with private equity fund disclosure,” Langeler says.

Kelly DePonte, a principal with Probitas Partners in San Francisco, agrees. Many GPs have no problem with the disclosure of the return on funds, but they are paranoid about having specific company valuations disclosed under the (FOIA), she says. “Limiting disclosure is going to have to happen in every state for GP paranoia to subside completely,” DePonte says.

No Fear

Not all venture firms are expressing paranoia. De Novo Ventures included public LPs such as UC when it closed its $250 million second fund in March. Likewise, Novak Biddle Venture Partners allowed UC to invest when it held a first close on $51 million for its fourth fund last December. General Partner Jack Biddle says the Bethesda, Md.-based firm has no problem with overall fund performance being made public, “But we are opposed to company-specific information being released, because that’s damaging to companies.”

Protecting company-specific information is exactly what the Colorado law does. It gives public LPs a legal reason not to disclose company valuation information if they are pressed to do so under FOIA or other disclosure laws.

“Things like a private company’s plans or its prototypes will be kept confidential because it’s proprietary and not in the public arena,” says Katie Kaufmanis, a spokesperson for CoPERA, which manages a $2.6 billion private equity portfolio.

Reporting by Lawrence Aragon, Carolina Braunschweig and Alastair Goldfisher.