Texas Attorney General Greg Abbott earlier this month became the first attorney general in the nation to publicly declare his support for the public disclosure of underlying asset information, so long as the company has indirectly received capital from publicly funded Texas institutions.
For example, private companies that raise money from Austin Ventures or Blackstone Group would be subject to FOIA requests for revenue projections, because both firms count the University of Texas Investment Management Co. (UTIMCO) as a limited partner.
In a speech before the Freedom of Information Foundation of Texas on Oct. 1, Abbott said: “The people of Texas – whose retirement savings and pensions are directly affected by these investment decisions –deserve no less than to have the light shine on the investment of these dollars. … There is no proof that secrecy will ensure good investments, but it is true that secrecy can conceal bad investments.”
Ever since the private equity disclosure battle began in late 2002, certain venture capitalists have warned that the industry was teetering on the edge of a slippery slope. Specifically, critics have said that the public dissemination of fund-level performance information would eventually embolden someone to call for the release of underlying asset information, like portfolio company valuations, revenue streams and other potential trade secrets.
Abbott’s speech was referring to pending litigation brought against the Texas AG by the Texas Growth Fund. Teacher Retirement System of Texas (TRST), a limited partner with Texas Growth Fund, later joined the suit (see PE Week, Sept. 27, pg. 1), which basically revolves around this issue of underlying asset disclosure. Abbott had ruled that the TRST must disclose certain underlying asset information related to its investment in Texas Growth Fund, following a FOIA request for the information brought by The Austin Chronicle. Both Texas Growth Fund and TRST disagreed with the ruling, and filed suit to let a judge decide.
Abbott declined repeated interview requests from PE Week, but spokeswoman Angela Hale said that his reference to the pending litigation could be extrapolated into a broader view of underlying asset disclosure. When asked if Abbott supports the public disclosure of portfolio company valuations and revenue streams, she said “yes.”
Hale also said that Abbott has not changed his position on the matter, because he had never been asked to rule on related issues in the past. “He only issues opinions when he is asked to,” she explained. Abbott’s actual record, however, is a bit murkier. In an earlier opinion also related to a FOIA request of TRST, Abbott’s Assistant AG, Cindy Nettles, wrote, “If the system funds were required to release information about their portfolio companies, those funds might be denied the opportunity to invest in prospective portfolio companies or forced to agree to less favorable investment terms to compensate the portfolio companies for the risk that their information will be released.”
Nettles further wrote, “that competitors of the portfolio companies could use the information at issue to compete with the portfolio companies and thereby harm the system’s investment. …We conclude that the system and TGF have shown that release of the information at issue will bring about a specific harm to the system’s and TGF’s marketplace interests.”
PE Week emailed a request to the Texas AG’s office for clarification on this earlier opinion, but spokeswoman Hale did not respond.
Abbott’s opinion on underlying asset disclosure is not yet binding in Texas. Even if a judge rules in Abbott’s favor on the pending litigation, future FOIA requests – including one recently filed by the Austin-American Statesman – may also find themselves in a courtroom until a ruling is issued broadly enough to be considered precedent-setting.
In the meantime, certain members of the Texas investment community are pushing state legislators to pass a bill that would exempt underlying asset information from being subject to open records laws. A similar measure was recently passed in Colorado, while both Michigan and Massachusetts also have exempted top-line data (although the Massachusetts state pension system has disclosed top-line data for funds raised more than five years ago).
Moreover, attorneys are advising venture capital and private equity firms with public LPs to take proactive steps.
One law firm sent a letter to clients last week that called on fund managers to reexamine the types of information that must be sent to limited partners, and instructed fund managers with Texas LPs to pay particular attention to “the level of truly confidential information being provided.”
The letter also says that certain clients have considered whether to ask public LPs to sell existing stakes on the secondary market and to ban such LPs from future funds.
One attorney acknowledges that there is not yet a decent test case proving that VC firms or their portfolio companies would be substantively harmed by the public disclosure of confidential information. Of course, the attorney adds, none of his clients are interested in serving as a guinea pig.
For his part, Abbott seems to believe that Texas institutions will be just fine without disclosure-wary firms. He said in his speech that “money management organizations around the globe would be glad to manage [Texas’] money.”
It might not take long before that theory is put to the test.
Email Daniel.Primack@thomson.com
If you do not receive this within five minutes, please try and sign in again. If the problem persists, please
email: