After months of speculation, the first real signs are emerging that top-tier venture firms won’t accept investments from public pension systems that have disclosed sensitive fund performance information. And the University of California smells grounds for a judicial reversal.
Attorneys representing the Regents of the University of California filed a “motion for reconsideration” on Aug. 4, asking Alameda County Superior Court Judge James Richman to reconsider a July 24 decision that the University of California must release internal rate of return figures for all 94 of its private equity partnerships. A hearing on the matter is scheduled for Sept. 8, but that date could be moved up, according to an attorney involved in the case.
The regents originally were petitioned to release IRRs on their private equity investments by three parties – the San Jose Mercury News, the Coalition of University Employees and Charles Schwartz, a retired University of California professor. Judge Richman granted the petition, writing, “none of the [regents’] the sky will fall’ concern has manifested.”
In addition to the motion for reconsideration, it is very likely that the regents will file an appeal to the judge’s decision by Aug. 18, according to a spokesman for the University of California’s Office of the President. (By law, an appeal must be filed no later than 25 days after a judicial ruling.)
In the motion for reconsideration, the regents make a compelling case that Judge Richman was presumptuous in claiming that the University of California would not be excluded from top-tier funds if forced to release IRR data. Richman wrote in his ruling that “the record as a whole demonstrates that other public pension plans have produced IRR information without the dire consequences predicted by the [regents] – indeed, that perhaps the dire predictions are false… Particularly persuasive is the evidence about Sequoia [Capital], admittedly a top venture fund, which recently accepted an $8 million investment from the University of Michigan, after that University publicly released IRR information.”
It turns out, however, that Sequoia Capital booted the University of Michigan, home of the Wolverines, from its most recent fund on the exact same day as Judge Richman’s ruling. Sequoia also asked the school to sell a handful of earlier positions in already-committed funds. In a letter to University of Michigan CIO Erik Lundberg, Sequoia General Partner Mike Moritz wrote: “This is the letter that we had long hoped we would not need to write. Yet I am afraid we have concluded with great regret that we must remove the University of Michigan from Sequoia Capital XI and would request that you use your best efforts to sell all of the University’s positions in other Sequoia Capital Partnerships. As you know, we are very concerned that the University will release confidential Sequoia Capital information to parties who have requested it under the Michigan Freedom of Information Act.”
Moritz’s letter also states: “Unfortunately, times have changed and the quiet curtain of privacy that protected our confidential information has been torn… We are also painfully aware of your predicament as the Chief Investment Officer of a public university that needs to answer to multiple constituencies, including people who hope to profit from the sale of data about the venture capital business and newspapers interested in publishing articles about our business. That is clearly their right. Yet we also have the right to protect our other clients, our portfolio companies and our sales from the various damages that can result from the dissemination of information that we consider highly confidential.”
Moritz’s letter bolsters the Regents’ argument that forcing public pension funds to release IRRs may cause real damages. By being uninvited to invest in Sequoia Capital XI, the University of Michigan could potentially miss out on the huge returns it enjoyed in the past. It received a return of $125 million through a total investment of $14 million in Sequoia Capital VI, VII and VIII, according to Mortiz’s letter.
Moritz was on vacation last week and could not be reached for comment. Other Sequoia partners did not return calls or emails requesting comment.
The regents’ motion also sounds the alarm that the University of California was told by Three Arch Partners that it would “not be invited to invest” in a new fund, after Three Arch learned of the court’s decision to force the university to disclose IRRs. “Other funds may follow suit, as the news of this Court’s ruling spreads throughout the venture capital community,” the motion states.
In a blow to the regents’ claim, Wilf Jaeger, a partner at Three Arch, told the Bloomberg news service that the firm didn’t invite the university into the fund because of space reasons, not because of concerns about it divulging IRRs. Jaeger was traveling and couldn’t be reached to confirm his statement before press time. Another Three Arch partner declined to comment.
None of this, however, has much of an affect on the plaintiff’s claim that the public interest in disclosure still trumps any possible fund snubs suffered by the University of California. David Satterfield, the Mercury News’ newly-installed managing editor, says that people have the right to know how public officials are spending state monies.
Karl Olson, an attorney representing the Coalition of University Employees and retired U.C. Berkeley professor Schwartz, doesn’t expect the judge to reverse course based on the motion for reconsideration. He called the effort a “disappointing refusal on the part of the board of regents to accept reality.”
“Their arguments are more of the same losing arguments that were presented to the trial court in the first place,” Olsen adds, “I’m confident that the judge will see it that way.”
Olson also maintains that Sequoia didn’t kick out the University of Michigan from Fund XI for releasing IRRs. Instead, it was because it had concerns about “what it might lead to.” The fact is that the California Public Employees’ Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) have not been kicked out of any funds for disclosing IRRs, Olson says.
In general, most venture capitalists say that they are not so concerned about the disclosure of IRRs. What they’re really worried about is the potential disclosure of underlying portfolio company valuations, which, in the words of one investor, “would be a real step backward for entrepreneurship.” The Mercury News’ Satterfield insists that the current case is only about IRRs, and that his newspaper has no interest in delving beneath the top-line. “I am the former business editor here, and I believe that certain private company information should remain private,” he says.
There is no consensus that releasing IRRs will lead to the disclosure of underlying valuations, but the various lawsuits create uncertainty, something that VCs would prefer to not have to worry about.
Steven Mayer, a partner at the San Francisco law firm of Howard, Rice, which represents the University of California Regents, says the case for the judge to reconsider is strong. “I assume he will give the Sequoia evidence the same weight as he did last time and reach the opposite conclusion – at least that’s our hope,” he says.
Asked about the ripple effects of the judge’s decision, Mayer says it’s too early to say. “I just don’t know,” he says. “Whatever happens at the Superior Court level, I assume one party or the other will appeal.” A decision handed down by an appellate court would carry more weight than a trial court decision, he adds. Of course, it will probably take a long time for the process to run its course, meaning VCs will have to hold off on any celebration if the Regents win the second round in court.
Dan Primack contributed to this article.
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