Return to secrecy

Overseer of UT's trust fund conceals details on investment performances

Houston Chronicle Austin Bureau
September 16, 2002

AUSTIN - As financial markets slide, the people charged with managing a trust fund that benefits Texas' largest state universities are hiding the performance of some of the fund's highest-risk investments.

Officials had promised increased disclosure after the Houston Chronicle reported in 1999 that a third of the $1.7 billion in so-called private equity investments were placed with major Republican political donors or business partners of then-University of Texas regent Tom Hicks.

For two years, the University of Texas Investment Management Co., which oversees investment of funds benefiting the UT and Texas A&M systems, regularly disclosed the profits and losses from those investments.

But after turmoil hit the nation's financial markets, UTIMCO quietly changed its policies late last year to remove some details of these investments from public scrutiny. UTIMCO directors have asked Attorney General John Cornyn to rule that such secrecy is allowed under state open records laws.

Suzy Woodford, executive director of the watchdog group Common Cause of Texas, called the move "outrageous."

She said the UTIMCO board of directors and the UT board of regents promised to release performance information on the private equity fund managers after the Chronicle's 1999 story.

"Based on the bad press they got, they had turned over a new leaf and were going to release more information to follow both the spirit and the letter of the Open Records Act to meet the public's right to know," Woodford said. "I'm really disappointed that they've reneged on that promise."

UTIMCO officials contend that greater disclosure would put the university investments at a competitive disadvantage, because some investment managers won't invest for institutions that require detailed public reports.

The money being invested includes the Permanent University Fund, made up mostly of oil and gas royalties from state lands dedicated to higher education.

Public disclosure and accountability are at issue because PUF investments benefit publicly supported universities.

The state Constitution section governing the PUF requires "full disclosure of all details concerning the investments of corporate stocks and bonds and other investments."

House Appropriations Chairman Rob Junell, D-San Angelo, said in 1999 that he believes the language in the Constitution would cover the private equity returns.

Junell, who drafted an unrelated 1999 constitutional amendment involving the PUF, recently said he has not studied the new policy, but still believes the public needs to know how PUF investments fare.

"My opinion is, just as a basic rule of thumb, we ought to be transparent," Junell said. "It's not good when that doesn't occur."

Late last week, the UTIMCO board of directors posted notice of a meeting Wednesday in Dallas to include "discussion of . . . disclosure policies." UTIMCO officials could not be reached to elaborate on the agenda.

While UTIMCO's quarterly reports still give the overall performance of private equity investments made since 1983, the reports now excise the performance of individual managers.

The Houston Chronicle discovered the changed policy in following up on its 1999 stories.

Those stories pointed out that the politically connected investment managers could reap millions of dollars in fees. It did not question the qualifications of the managers, all well-established in the field.

The private equity funds are high risk, but they also hold out the promise of better returns than could be achieved on the public stock market.

The private investments typically are in things like venture capital for start-up companies or in undervalued companies that investment bankers believe they can make profitable. The initial investment is a loss, but the potential for profit occurs when the business does its initial public offering of stock.

Managers typically receive fees that are 1 percent annually of the amount of capital invested with them plus 20 percent of whatever profit the investments earn.

UTIMCO was set up in 1995 to professionally manage the PUF as well as university endowments that are mostly financial gifts from benefactors.

Under the reduced disclosure adopted last year, it is not possible to determine precisely how the individual private equity funds have performed.

The reports provided to the public now conceal the columns listing remaining value of invested money and internal rate of return - performance of the investments over time.

To the extent that their performance can be determined based on earlier documents and the newer limited information, the politically connected managers have had mixed success in a tough market.

For example, the PUF has lost money in a 1996 investment with the Beacon Group, an investment manager that was doing business with Hicks and another UTIMCO board member.

But the PUF has averaged 16 percent return per year over the past three years on its investment with the Maverick Fund. That fund was founded by members of Dallas' Wyly family, who are big GOP contributors.

The exact amount of losses and gains cannot be determined from the publicly disclosed investment reports, however, because they do not show how much of the money invested is left.

The PUF, like all investment funds, has been battered in the recent stock market declines.

During the three months ending July 31, the PUF lost 8.72 percent of its value - a decline of $595.5 million. At the end of July, the PUF was worth $6.7 billion.

UTIMCO's new president, Bob Boldt, said the fund overall is actually performing acceptably, considering market conditions.

Boldt said the stocks and bonds portion of the fund lost 8.12 percent in the year ending July 31, compared with a predicted decline of 7.99 percent based on the overall market. Boldt said the PUF, excluding the private equity portfolio, had a better performance than 58 percent of the endowment funds rated nationally by Cambridge Associates.

The private equity portion of the PUF lost 15.96 percent of its value, Boldt said.

UT regents set up UTIMCO under legislation signed into law by then-Gov. George W. Bush.

Hicks was chairman of the UTIMCO board and later bought the Texas Rangers baseball team from a consortium that included Bush.

Earlier this year, university officials defended UTIMCO's disclosure policies after the New York Times' Paul Krugman cited the Chronicle's 1999 report in a column on Bush's handling of corporate scandals as president.

Krugman wrote that the investments "were hidden from public view."

Former UT Chancellor William Cunningham and former UT Board of Regents Chairman Bernard Rapoport responded on the editorial pages of newspapers across the country by criticizing the Krugman column.

"Detailed reports on UTIMCO investments are made public," Cunningham and Rapoport wrote.

When the UTIMCO board of directors adopted the new policy, they framed the move as a vote to comply with the state's open government laws.

The UTIMCO board comprises three members of the UT board of regents, the chancellor of the UT system, and five investment professionals.

Boldt, who joined UTIMCO in April - months after the board decided to exempt the private equity portfolio from full disclosure - said private investment bankers do not want information on their investment funds made public. These managers will not invest money for a public fund that discloses the information, Boldt said.

"Even the public information laws as they exist in Texas allow the withholding of information when it would put the state or state funds at a competitive disadvantage in the marketplace," said Boldt.

"My job is to try to earn the best return I can for the fund," he said. "The top funds demand privacy, and you give it or you don't invest with them."