Reuters – University of California Must Reveal VC Data

The closely guarded performance of some top-tier venture capital funds in which the University of California invested a portion of its $10.65 billion endowment must become public, a judge said on Monday, Reuters reported. No information will come out immediately. The court is giving the university a stay until March 11 to allow the regents a chance to appeal. The order goes a step farther than earlier tentative rulings because it calls for the university to make an “objectively reasonable effort,” based on “what the legislature would consider to be a reasonable effort,” to obtain performance information on the funds. Previously, the judge had called for a “good-faith effort.” The original lawsuit, filed last year in California state court, argues that the state Public Records Act requires disclosure of specific investment-return information for funds invested with venture capital firms Kleiner Perkins Caufield & Byers and Sequoia Capital.

(Reuters) – The closely guarded performance of some top-tier venture capital funds in which the University of California invested a portion of its $10.65 billion endowment must become public, a judge said on Monday.

No information will come out immediately. The court is giving the university a stay until March 11 to allow the regents a chance to appeal.

“I regard this as a victory,” said Karl Olson, outside counsel for Reuters America, a unit of Thomson Reuters Corp , which brought the suit.

A representative for the University of California declined to comment. Representatives from the funds, which are not themselves parties to the case, did not immediately respond to requests to comment.

The order goes a step farther than earlier tentative rulings because it calls for the university to make an “objectively reasonable effort,” based on “what the legislature would consider to be a reasonable effort,” to obtain performance information on the funds. Previously, the judge had called for a “good-faith effort.”

The original lawsuit, filed last year in California state court, argues that the state Public Records Act requires disclosure of specific investment-return information for funds invested with venture capital firms Kleiner Perkins Caufield & Byers and Sequoia Capital.

Reuters argued that the public had an interest in seeing details on the funds’ performance, and previous rulings have held that the university’s returns are public records. The university argued that Kleiner and Sequoia considered the information confidential and that it receives only aggregate returns data from those two firms.

Some venture capital firms strive to keep information about their performances secret because they fear a bad year might hurt their reputations, other venture capitalists say.

The university has said the investment-performance information for the individual funds is not in the public record because it does not have the data. It says it only receives aggregate data on its holdings in multiple funds run by the two firms – a structure the lawsuit alleges is designed to avoid disclosure.

The university failed to show that the performance data for individual funds “does not relate to the conduct of the people’s business or that it does not have constructive possession of that information,” wrote Judge Evelio Grillo in his order. Constructive possession means the right to control the records.

“Assuming that the regents can obtain the fund level information, it is not exempt from disclosure,” he wrote. Sequoia has already made some returns data public.

The lawsuit illustrates the conflict between the desire of public investment funds to invest with top-tier venture firms and the desire of some of those firms to keep their performance under wraps.

California’s public-records law, which was amended after a 2003 lawsuit forced the University of California to disclose investment returns, shields some types of investment data from disclosure, such as details about the performance of the underlying companies that make up venture funds.

It explicitly states that other pieces of information, including the dollar amount of the commitment made, the net internal rate of return and the dollar amount of cash distributions received, are not exempt from disclosure.

The Reuters lawsuit, filed a year ago, stems from a request for individual fund details on the university’s investments in Kleiner and Sequoia Capital funds by Mark Boslet, senior editor at Thomson Reuters’ Venture Capital Journal and PeHub, an online publication about private equity, buyouts and venture capital.

On its website, the university provides updated individual-fund level returns for all venture funds that date from before 2007 in its portfolio except a handful of funds. They are an Accel Partners fund the university has since provided information on, the Kleiner funds and the Sequoia funds.

More recent funds’ returns are not considered meaningful, as venture capital can take several years to start showing returns.

Public-records laws caused tension over suddenly public information for venture-capital firms about a decade ago when many public groups started disclosing returns. Since then, many states have clarified their laws to detail exactly what must be disclosed, and most venture-capital firms have grown used to the possibility that their returns could become public. However, several top venture capital funds generally do not take investments from public groups they believe could disclose their returns, lawyers, consultants, investors and advisers say.

While even those top firms are not in a position to turn down all direct investments of public money, they can limit it to states and institutions with public-records laws and policies that don’t require disclosure of returns.

The case in Superior Court in the State of California, County of Alameda, is Reuters v The Regents of the University of California, case no. RG12613664

Image credit: Photo of bank vault courtesy of ShutterStock

2 Comments

  • From the time of the original San Jose Mercury-led disclosure suits, top tier VCs have largely declined to accept capital from public investors. As private entities, the VCs are entitled to invest in a private fashion (and they make a cogent argument for why this benefits their investee companies and investors alike). Since it is fair to assume Cal Regents and other public entities have an ability to conduct proper assessment guiding their investment decisions, the single largest impact of reuters/pehub effort is to deny pensions for public employees access to the best investments possible. Reuters, pehub et al went after the easy target – public entities – thus ensuring a certain segment of the population (public pensions) are denied the opportunity to make optimal decisions for the benefit of their constituents. These publications have long known this to be true, and equally that there was no arguable beneficiary of disclosure. It is sad and particularly ironic as CalPERs, CalSTERs, Regents etc were subject of these suits and many of these investment opportunities reside in California.

  • I worked in the Venture industry for 8 years. Beware of unintended consequences. This battle has been going on for a while. The net result will be that the best funds will not take money from public pension funds in CA and elsewhere because they can raise more than they need to. CA will still invest in the asset class but will lose access to some top tier funds which is a bad outcome for everyone.

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