The debate about how secrecy in the venture capital world has broken out again, and it could have impact on Silicon Valley companies.

It is being sparked by the most unlikely of places, the Ohio Bureau of Workers’ Compensation. At stake is whether venture capital firms taking money from this bureau — and surprisingly, there are many — can shield their investments from public scrutiny.

This is significant for Silicon Valley entrepreneurs and investors because this Ohio bureau has, like other public institutions in the country, invested in many Bay Area venture firms, or firms that have made investments here. Now the Ohio bureau is apparently planning to release the valuations of companies that these firms have invested in. If you’re a company taking money from one of the institutions listed at the bottom of this post, you might want to sit up and…

take note.

We haven’t written about this so-called “disclosure” debate for a good eight months as things seemed to have cleared up in California. Here, we have reached a sort of compromise, where state pensions and endowments such as CalPERS, CalSTRS and University of California release the financial performance data of the firms they invest in, but do not publicly release the valuations of the individual companies those firms invest in.

Dan Primack of PE Week, has been leading the charge on the reporting about Ohio, and here is his initial report.

Here is VentureWire’s story this morning, which carries similar reporting.

Meanwhile, our two cents:

Releasing the valuations of these portfolio companies is probably not a good idea, because it harms the state’s investment climate. Venture firms will shy away from accepting public money from that state’s pension funds, and the public could therefore lose out from the potential profits those venture firms produce.

However, the crisis that sparked the Ohio problem — a bad performing “coin” investment — suggests that public pension funds do need to keep close scrutiny of the performance of its investments. We don’t know the exact details of the case, so we continue here at our own peril. We’d submit, though, that scrutiny can be done without disclosing portfolio valuations publicly.

If what VentureWire reports is true — that the Ohio BWC discovered it hadn’t independently reviewed any of the returns portfolio managers had submitted, which raised fears that there could be more bad apples in its portfolio — that is a striking example of being asleep at the wheel. And now, after being caught for not performing its original job of adequate scrutiny, Ohio is apparently swinging to the other extreme and releasing all information publicly. Sure, in cases of a “scandal” such as this one, an exception should be made for the individual company concerned — the firm responsible for the investment should be investigated, and the results should be made public. But releasing all portfolio information publicly — even of the firms not involved — seems like throwing out the baby with the bathwater, no?

(PS. Of course, Ohio should have to abide by its own disclosure laws, but perhaps it should consider passing a compromise law similar to the one in California.)

Here is the list of firms affected, according to Dan Primack:

General partners include, but are not limited to: ABRY Partners, ABS Capital Partners, Athenian Venture Partners, Carlyle Group, Castle Harlan, Charter Life Sciences, Draper Triangle Ventures, EDF Ventures, Edgewater Funds, Edison Venture Fund, Fort Washington Capital Partners, Fremont Partners, Halpern Denny, HarbourVest Partners, Lexington Partners, Invesco Private Capital, MCM Capital Partners, MK Capital Management, Pharos Capital, Primus Venture Partners, Quad C Advisors, Reservoir Capital Ventures, TCW/Crescent Mezzanine, Thayer Capital Partners, Triathlon Medical Ventures and Wind Point Partners.

Update: Dan Primack follows with his latest musings on this. We couldn’t have said it better.

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