Private equity’s sunshine problem


In October, New York Times reader Saqib Bhatti penned a letter questioning the ethics behind keeping private equity limited partnership agreements confidential.

“It is absurd that … huge pension funds like the California Public Employees’ Retirement System refuse to demand transparency from private equity firms for fear that the firms will stop doing business with them,” Bhatti wrote in the Oct. 20 letter to the editor. “Wall Street boycotting CalPERS would be like popcorn vendors boycotting movie theaters.”

The spirit of Bhatti’s letter is right on track, though the details need to be fleshed out. High-level private equity fund terms should be open for public consumption – there is no reason these terms need to be hidden from the beneficiaries of the pension systems that invest in the funds.

Here is a list of terms that should be open for viewing at all public systems in the United States, and these should be made public at the very least within several weeks of commitments being approved:

• name of firm and fund

• commitment amount

• fund target

• any and all fees, including carry, management, monitoring, board and transaction fees

• percentage of any fees that will be shared with the LP

• key fund executives

• general investment strategy

• fund track record

• placement agent (if any)

• political donations to local officials, and

• pros and cons outlined by investment staff

Also helpful would be a summary and rationale behind investment staff’s decision to invest in the particular fund.

To be sure, several public systems already include this information, so it is perplexing why every public system doesn’t disclose even this very rudimentary level of information.

One public LP that doesn’t provide enough timely information about its PE investments is the Colorado Public Employees’ Retirement Association. The system has a list of all the commitments it has made going back to 1982, but it only updates the current year’s activity months into the next year. This is due to state law, according to Katie Kaufmanis, public information officer with the system.

The data provided by Colorado includes internal rates of return since inception, so performance can be tracked. However, anyone looking for Colorado’s private equity activity this year, for example, is out of luck until sometime next year. And forget about information on the fees the system pays to individual funds.

The Maine Public Employees Retirement System had formerly been open on details of its commitments. For example, we learned from Maine documents that H.I.G. Bayside is in the market targeting $1 billion for its H.I.G. Bayside Loan Opportunity Fund IV. More importantly, the documents revealed some concern on the part of Maine’s investment staff about what they saw as a high level of turnover in Bayside’s managing director ranks. After we published a story about the staff’s concern, we learned yet another Bayside managing director, David Robbins, had also left the firm. Pensioners and tax payers should have access to this kind of information to understand the risks investment staff is considering while managing their money.

The routine defense of confidentiality is that revealing this kind of information would hurt firms, and, by extension, LPs and their beneficiaries, by putting GPs’ “trade secrets” out there. Steve Judge, president and chief executive officer of the Private Equity Growth Capital Council, wrote in a column for peHUB this week that making LPAs public is:

akin to demanding that Coca-Cola publish its famous (and secret) soda recipe. Like Coke’s secret recipe, LPAs contain proprietary and commercially sensitive trade secret information that, if disclosed, could undermine a private equity fund’s ability to invest and generate high returns for its limited partners. Overnight, competitors would have access to sensitive information, like the fund’s investment strategy, investment limitations, and key personnel that competitors could use to outbid the fund on a deal or otherwise disadvantage it in competitive negotiations.

To be clear, I don’t believe full LPAs should be made public. Detailed information about portfolio company financials should be confidential to protect from competitors.

But this is not the case for these high-level terms. Most terms in the industry are very similar and some public systems already release much of this information, making it available to the public already. Firms have had to learn and adapt to a world where this information can be widely available, depending on a fund’s LP base.

The idea that a big public system risks losing access to top-level managers by revealing this information is laughable. While top-performing GPs can pick and choose who comes into their fund, getting into those vehicles is likely not a function of how much information you make public about your private equity program. For example, the Los Angeles County Employees Retirement System, which routinely shares information about its PE investments, was not prevented from committing to Hellman & Friedman’s latest fund, which was one of the most in-demand funds this year.

Firms can threaten and cajole all they want, but in the end, if they need money to hit their targets, they’re going to take commitments even from disclosure-friendly LPs. And if a firm decides to exclude a retirement system from its fund because of that system’s level of disclosure, the system is better off moving to the next manager. There will be another great manager just around the corner less concerned with making public information about the fund.

It is time for consistency across the U.S. public pension system universe when it comes to private equity transparency. High-level terms should be made public in a timely fashion for everyone to understand the costs, benefits and risks of a system’s private equity program.

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