VCs To Reporters: Stop Prying!; Rather than risk disclosure, some funds are giving back money

Julie Creswell
13 October 2003
Fortune

There's full disclosure, partial disclosure, and the disclosure some venture capital firms are seeking: none.

The dispute--now playing out in a California court--involves how much the public deserves to know about investments made in public pension funds and university endowments. For decades state pensions and university endowments have quietly augmented their portfolios with riskier but often more lucrative private-equity investments. But prompted by concerns that the investments were dramatically underperforming, journalists at papers like the Houston Chronicle last year began serving universities and public pension funds with Freedom of Information Act (FOIA) requests. (Because VCs and buyout outfits don't release performance numbers, and institutions break out performance only by broad asset classes, an FOIA request was the only way to get any data.) The reporters wanted to know what funds the institutions were investing in and how those funds were performing. The California Public Employee Retirement System (Calpers) was one of the first public institutions to comply, and the University of Texas pension and endowment fund followed suit last fall.

What pleased the journalists outraged some VCs. In July, Sequoia Capital Partners, one of the oldest and most respected firms in the Valley, struck back. Fearing the Universities of Michigan and California endowment systems would comply with similar media requests, Sequoia asked both to pull their money from its fund. Michigan officials released the information without removing their money. California officials did not comply with the FOIA request, and the San Jose Mercury News took them to court. In July a judge ruled that the university had to release the data; the university lost its first appeal and plans a second.

The dispute worries public universities and pension plans because they don't want to lose a lucrative investment option. "We've been in Sequoia for more than two decades," says Trey Davis, a spokesman for the University of California's $53 billion portfolio. In the past five years audited reports show the university's stake in private-equity funds has returned an average of 32% a year. Davis says UC was in negotiations to invest with VC firm Three Arch Partners when the judge's ruling came down. Three Arch promptly ended the discussions. Already some VCs are reportedly targeting new funds at European investors and private institutions.

Critics say the VCs are stonewalling because they're embarrassed by poor returns since the bursting of the bubble. Not so, says Jeanne Metzger, a spokeswoman for the National Venture Capital Association. She argues that because the stakes VCs take in private companies are often worthless for the first few years, short-term performance data is irrelevant. More important, the private-equity firms are worried about setting a precedent of more disclosure. "We draw the line at the release of individual company information," says Scott Sperling, a managing director at Boston buyout firm Thomas H. Lee Partners. "That information could be detrimental to the company itself as well as all the partners in the fund." Should anyone start demanding, the likely consequence would be that private-equity firms would clam up even more, refusing to release certain data to even their own investors. Ironically, current efforts to improve disclosure could ultimately lead to less. -- Julie Creswell