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Required Disclosures by Public Investors in Private Equity Funds12/17/2002 More and more these days, public institutional investors are being asked to disclose information regarding their investments in private equity. Journalists, as well as entrepreneurs looking to commercialize the information, have begun seeking access to information about the performance of private equity funds by submitting requests under the Freedom of Information Act (“FOIA”) or the relevant state’s analogous statute. In October of this year, the University of Texas Investment Management Co. (“UTIMCO”) published the results of the various private equity funds and buyout funds in which it has invested. UTIMCO’s decision to publish the information may have ended its dispute with the Texas newspaper that requested the information, but it has created much concern and controversy among private equity funds about the future confidentiality of their proprietary information when they accept public institutions as investors. In California, a forthcoming court decision could establish new rules for confidentiality of fund performance data and related information regarding private equity investments made by public entities. Shortly after UTIMCO published its information, the San Jose Mercury News sued the California Public Employees’ Retirement System (“CalPERS”) seeking disclosure of information relating to its private equity investments. The suit revolves around four types of information: (1) identity of portfolio companies, (2) fund performance data, (3) valuations, and (4) CalPERS’ internal evaluations of performance by the funds. On November 14, 2002, Judge James Robertson issued a tentative ruling, finding for the San Jose Mercury News on some issues and for CalPERS on others, and granting each side the right to submit additional arguments in favor of its position prior to the issuance of a final decision. Judge Robertson held that the identity of portfolio companies and valuations could qualify as trade secrets and, therefore, were not subject to disclosure under the California Public Records Act, California’s equivalent to FOIA. However, the judge allowed the San Jose Mercury News to submit further arguments as to why the identities of portfolio companies should not be considered trade secrets protected from disclosure. In order for the private equity funds in which CalPERS has invested to prevent disclosure of their valuations, each of the general partners must certify to the court by December 9, 2002, that the valuations have been provided only to parties who are subject to confidentiality agreements. If a general partner cannot certify that disclosures have been made only to parties bound by confidentiality agreements, then a referee appointed by the court will recommend to the court whether disclosure of such information is excused. Judge Robertson also held that performance data such as Internal Rates of Return (IRRs) were not presumptively trade secrets, but prior to making a final decision, he asked to receive arguments from the private equity funds themselves. As a result, in order to prevent disclosure of IRRs, the general partners of each of the private equity funds in which CalPERS is invested must submit arguments to the court in support of the position that their IRRs are trade secrets. The judge gave the general partners until December 9, 2002 to submit their arguments. With regard to CalPERS’ internal evaluations of fund performance, the court held that the information was not presumptively a trade secret, but is allowing CalPERS to submit arguments against disclosure based on public policy reasons. Thus, CalPERS may argue that the harm caused to CalPERS and its investors by a court ordered disclosure outweighs any benefits that could be gained by such disclosure. In particular, disclosure would effectively cut off CalPERS from future investment opportunities in private equity. If internal fund evaluation information were subject to disclosure, CalPERS could potentially become an unwanted investor in those private equity funds that do not want and cannot have internal evaluations by CalPERS become public knowledge. The court will make its final decision on January 30, 2003. The general partners may face an uphill battle since CalPERS has previously disclosed certain information relating to its private equity investments, including publication of information on its Web site. The ruling could set the standard for disclosures by public investment entities in the future. If the court allows disclosure and does not protect the information, it would not be surprising if reporters and individuals seeking monetary gain made a flood of similar requests to the remainder of public entities in California that invest in private equity. In fact, the San Jose Mercury News has already requested similar information from the City and County of San Francisco Employees’ Retirement System and the California State Teachers’ Retirement System. The decision in the CalPERS case could also affect the outcome of a similar dispute currently brewing in Massachusetts. A reporter and an individual seeking to commercialize the information have both requested information on private equity funds in which the Massachusetts Pension Reserves Investment Management Board (“MassPRIM”) is an investor. Several of the general partners of the private equity funds involved have indicated that they are prepared to file suit to prevent any disclosure of information by MassPRIM in response to the requests. In light of the recent events in Texas and California, the private equity funds are taking the initiative to prevent disclosure, as opposed to relying solely on MassPrim’s defense. The current trend of third parties seeking information about private equity investments from public institutions could have far reaching effects. Private equity firms are concerned that if any of their heretofore confidential information is made public, it will mark the beginning of a slippery slope, leading to the disclosure of more and more information, including specifics about portfolio companies. Disclosure of such information could jeopardize the relationships between private equity firms and their portfolio companies and could have an adverse effect on the performance of the portfolio companies themselves. In addition, disclosure could allow competing private equity firms to determine the investment strategies of other firms. Public institutional investors are likewise concerned that disclosure will result in private equity funds refusing to deal with public entities subject to forced disclosure. Public institutional investors would then be prevented from investing in private equity and the potentially lucrative returns that go along with it. Their investors would feel the ultimate effect in the form of lower returns and less value in their pension funds. While disclosure may satisfy some of today’s curious minds and opportunists, it could create much greater damage in the future. In the meantime, private equity funds should reevaluate their internal treatment of confidential information to ensure that proper steps are being used to protect and maintain the trade secret status of such information. If you have any questions or concerns about the recent developments surrounding disclosure of proprietary private equity fund information by public investment entities, or if you would like more information on steps that can be taken to maintain the confidentiality of proprietary information, please contact: Charles Jacobs William Kelly Darcy Pertcheck This memorandum is a general summary of recent events for informational purposes only and is not intended to be legal advice related to specific circumstances. This may be considered advertising under certain professional rules of conduct. The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct. The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct. |
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