California’s private equity disclosure law: Early peek

CLARIFICATION: We’ve located the latest copy of the legislation: See here. Turns out, it was officially introduced in February, and April 26 is the date the Senate will hold a hearing on it. This is a good site to follow developments, and see history. Also see update below.

When venture capital and buyout firms take money from public institutions like California’s big pension fund CalPERS, the law requires them to disclose certain information so that the public can hold them accountable. Here’s a glimpse at the new draft legislation to be introduced by California state Senator Joe Simitian’s office April 26, designed to clarify the state law (See extended entry below).

We’ve followed this latest legislation discussion as it evolved. It seems to make a lot of sense…

…True, the draft may not be final version, because last time we checked in on this, CalPERS & co. were still fighting over exact wording. But it’s pretty close. See section 2a. 1-9 for the essentials. Note that it calls for IRR data to be released, as expected, and seems to strike a compromise on disclosure of detailed fee data, again as expected.

This may be pretty esoteric stuff for most readers, but a lot of Silicon Valley venture capitalists care deeply. The law governs how much information VCs must disclose about their financial performance and the amounts they’ve invested into start-ups, etc — sensitive stuff.

(UPDATE: Of course, some critics remain, for example UC Berkeley professor emeritus Charlie Schwartz. He thinks the exempted information goes too far. For more on the legislation’s exempted info, see sections 2b. 1-6 below. Note that hedge funds, which are included among the firms that fall under the law, wouldn’t have to disclose their positions in publicly traded stocks. We’ll try to delve more into this later. Meantime, we’re interested in feedback, and welcome comments. For starters, check out Schwartz’s letter to Simitian here. We’re curious what readers think of his critique — listed in paragraphs “A”, “B” and “C” in the letter.)

LEGISLATION

SECTION 1. The Legislature finds and declares the following.

(A) Access to information concerning the conduct of the people�s business is a fundamental and necessary right of every person in this state pursuant to Article I, section 3(b) of the California Constitution and Government Code section 6250. The public has a paramount interest in knowing how public money is spent and invested.

(B) Public pension and retirement systems, and public endowments and foundations, have a fiduciary duty to invest the assets of such funds with care, skill, prudence and diligence. This fiduciary duty includes diversifying the investment of assets in a manner so as to minimize the risk of loss and maximize the rate of return. Investment in high performing alternative investments is a component of diversifying the pension assets and maximizing the rate of return.

(C) At the same time, a certain narrow class of public investments, alternative investments, involves some information which historically has been kept confidential and as to which confidentiality is essential to the success of such investments. The disclosure of certain information pertaining to alternative investments could be harmful to generating sustainable and profitable rates of return for the investments of the pension or retirement system and of the public endowment or foundation. Public pension systems desire to invest a portion of their portfolio in alternative investments to boost return.

(D) Following recent litigation seeking to require public pension funds and retirement systems and public endowments or foundations to disclose certain information about alternative investments, the funds have been at risk of exclusion from participation in certain investments. Exclusion from investing pension or retirement system assets in alternative investments may impose substantial costs on state public pension funds and the public employees that are their beneficiaries.

(E) It is the intent of this legislation to balance the public�s right of access to information and the ability of public pension funds to continue to invest in alternative investment funds. It is also the intent of this legislation to allow the public to monitor the performance of public investments; for public bodies to avoid payment of excessive fees to private individuals or companies; and for the public to be able to know the principals involved in management of alternative investment funds in which public investment funds have invested so that conflicts of interest on the part of public officials can be avoided. Nothing in this legislation is intended to reverse the general presumption of access and openness of the Public Records Act and Article I, section 3(b) of the California Constitution.

(F) It is not the intent of this legislation to overrule or invalidate any court orders in or stipulated resolutions of prior litigation relating to any public entity�s obligation to disclose information about its alternative investments or to narrow the information disclosed as a result of those decisions or otherwise. It is, rather, the intent of this legislation to establish predictability about what should and should not be disclosed regarding private equity funds so that public pension funds will be able to continue to invest in private equity funds.

SECTION 2. Government Code section 6254.26 is added as follows.

(a) Notwithstanding any provision of this chapter or other law, the following information regarding alternative investments in which public investment funds invest shall be subject to disclosure pursuant to this chapter and shall not be considered a trade secret exempt from disclosure:

(1) The name, address, and vintage year of each alternative investment vehicle;
(2) The dollar amount of the commitment made to each alternative investment vehicle by the public investment fund since inception;
(3) The dollar amount of cash contributions made by the public investment fund to each alternative investment vehicle since inception;
(4) The dollar amount, on a fiscal year end basis, of cash distributions received by the public investment fund from each alternative investment vehicle;
(5) The dollar amount, on a fiscal year end basis, of cash distributions received by the public investment fund plus remaining value of partnership assets attributable to the public investment fund�s investment in each alternative investment vehicle;
(6) The net internal rate of return of each alternative investment vehicle since inception;
(7) The investment multiple of each alternative investment vehicle since inception;
(8) The dollar amount of the total management fees and costs paid on an annual fiscal year end basis, by the public investment fund to each alternative investment vehicle; and
(9) The dollar amount of cash profit received by public investment funds from each alternative investment vehicle on a fiscal year end basis.

(b) Notwithstanding any provision of this chapter or other law, the information contained in the following records regarding alternative investments in which public investment funds invest shall not be subject to disclosure pursuant to this chapter, unless such information has already been publicly released by the keeper of the information:

(1) Due diligence materials that are proprietary to the public investment fund or the alternative investment vehicle;
(2) Quarterly and annual financial statements of alternative investment vehicles;
(3) Meeting materials of alternative investment vehicles;
(4) Information regarding the portfolio positions in which alternative investment funds invest;
(5) Capital call and distribution notices;
(6) Alternative investment agreements and all related documents; and,

(c) The disclosure of any record or information not specifically mentioned in subdivisions (a) or (b) of this section shall be governed by the other provisions of this chapter.

(d) For purposes of this section, the following definitions shall apply:

(1) �Alternative investment� shall mean an investment in a private equity fund, venture fund, hedge fund, or absolute return fund.
(2) �Alternative investment vehicle� shall mean the limited partnership, limited liability company or similar legal structure through which the public investment fund invests in portfolio companies.
(3) �Public investment fund� shall mean any public pension or retirement system, and any public endowment or foundation.
(4) �Portfolio positions� shall mean individual portfolio investments made by the alternative investment vehicles..