Talking to UTIMCO

Bob Boldt has clearly been talking about this thing for longer than even he expected. When the board of UTIMCO, a not-for-profit company that provides investment management services to the Board of Regents of the University of Texas System, decided to disclose the performance data on all of the buyout and venture capital funds it had invested in, he knew that there would be considerable interest and comment from many quarters. But he couldn't have predicted the sheer amount of debate that it provoked. Whether it be The Houston Chronicle, The New York Herald or The London Times, Boldt has been quizzed by both finance and mainstream journalists about it. ?In an ideal world I'd be talking to my family, my friends and colleagues and to those who we invest with,? he says, ?but I accept that part of my job is to talk to the media about this: it's time-consuming, but necessary.?

Why go public now?
Boldt describes how UTIMCO, a long-standing investor in private equity that allocates anything up to 25 per cent of its capital to alternative assets and to private equity in particular, has had a long-running debate internally as to how much information it should disclose about its private equity investments. Prior to his joining the group, it had been decided by the board (some two years ago) that, in order not to compromise its ability to participate in any fund being raised, the degree of disclosure would be limited to responding to direct requests.

UTIMCO, like many other limited partners, was alive to the fact that it was at times difficult to receive allocations in the popular funds and hence was wary of antagonising any GPs sensitive to disclosure. As a public sector institution though, UTIMCO was bound to the same Freedom of Information Act principles that other such investors were ? meaning that any member of the public who wanted information about their activities and operation had to be answered. Although different states (and different institutions) have different interpretations of this principle, it nonetheless means that various other public sector private equity investors are now being lobbied to disclose their private equity portfolios. (See also America Monitor on page 11 of this issue.)

What happened at UTIMCO in early October of this year though was a move from passive to active disclosure. Boldt says there were a number of factors why this happened: ?One reason why the board saw the need to do this was the radically changed environment: post-Enron we were aware that people were far more suspicious of large companies and, as part of that, were going to ask questions about any institution that invested millions of dollars in private entities.?

There was also the issue that the local newspaper, The Houston Chronicle, had been pressurising UTIMCO to reveal what funds it had invested in and how these were performing as part of a broader story that attempted to connect fund selection with personal and political relationships. The fact that George W. Bush is the former governor of Texas has made media coverage of the state all the more inquisitive.

Boldt is philosophical about this: ?Up to the [State] elections in November you could see that we were a pretty obvious target but it's worth saying too that much of the media coverage has been pretty good ? level and objective, with many reminding readers that the information should be used with caution.?

If you log onto the UTIMCO website, www.utimco.org, you can see which private equity funds it has invested in and that many of the more recent vintage funds are underwater at present. You'll also find a section explaining the J curve effect, a phenomenon that many have been debating as part of their assessment of those loss-making funds.

Boldt, for one, is certainly not distraught at the current condition of UTIMCO's private equity portfolio and gives no indication that there will be a significant withdrawal from the asset class by the fund. In fact, it is the prospect of not being able to access new funds that he would like to invest in that is a source of concern. ?I do hope that we don't see the industry bifurcate,? he says, ?with one group of private equity funds accommodating only those investors who accord wholly with non-disclosure and another group where you'll have funds who are prepared to allow some disclosure.? Because for public sector limited partners who are bound to disclose it's the latter group which will be the only option, and that immediately restricts choice and diminishes the prospect of maximising returns ? accepting that some funds in the non-disclosing group will be star performers.

No more details
Another major public sector investor in private equity is CalPERS, Boldt's former employer, where he ran the pension plan's public equity investments, and worked alongside both Barry Gonder and Rick Hayes, the two successive heads of its alternative investment programme. Boldt recollects: ?At the time it struck me that the amount of time and attention devoted to [CalPERS'] private equity investments was disproportionate to its significance in the overall allocation. It was less than 10 per cent of this but took much more of the board's attention.?

One reason why this happens, says Boldt, is that private equity, besides being difficult to track in terms of hard data, invites curiosity. This is another reason for the media attention of the past weeks: ?It's got all the ingredients for an investigative journalist: high profile, powerful individuals; hundreds of millions of dollars in play; a seeming reluctance to make information public: people can readily portray what we've done as something dramatic that upsets this private world.?

Which it probably has. When asked about the response to the move from the GPs whose funds are in UTIMCO's portfolio, Boldt says it has been pretty much consistent: ?They're not happy.? With hindsight Boldt's minded that UTIMCO should have taken the conversation to the GPs: ?To be honest I think we needed to have spoken to them sooner and in more detail about what we were planning to do ? but it just didn't happen that way.? Certainly a number of these GPs have gone on record saying that disclosing this type of information to the public is ?dangerous? and have bridled further at the suggestion in some parts of the media that UTIMCO plans to disclose further detail on the funds it is invested in, including the other LPs in the fund and the investee companies that make up each fund's portfolio. Boldt is quick to counter this rumour: ?We have no plans to offer further detail on the funds,? he asserts, ?as it's clear to us that it could, amongst other things, prove awkward for the portfolio companies.?

Boldt and his team are now busy rebuilding bridges with the private equity firms, spending considerable time on the phone and on the road discussing, amongst other things, what a suitable disclosure policy might be. Clearly some are suggesting that none is the best option and Boldt himself is ever-mindful of the non-disclosure undertakings that form part of any partnership agreement. Few foresee a radical rethink on the structure let alone principles that determine these documents, so instead the prospect is for particular LPs to negotiate different disclosure terms that suit their particular requirements: something that many GPs will seek to decline if at all possible. At issue here is the degree to which those with significant investment capital ? and the public sector pension funds are some of the largest ? carry enough weight for fundraising GPs to be prepared to listen to them. If a GP can avoid such discussions, the likelihood is that they will.

Boldt himself also acknowledges that there is a point to non-disclosure, accepting that IRR can be seen as a moving target where different cashflows and timelines can create multiple versions of a fund's IRR. That's why UTIMCO took the trouble to put a very visible and substantive health warning on the fund data it put out. But to simply shrug and decide then not to attempt any sort of performance evaluation ? and hence benchmarking and peer comparison ? is no solution. Boldt, who after leaving CalPERS worked with a hedge fund group so has a long standing knowledge of and empathy with the private capital industry, is not embarking on a crusade but is intent on analysing his portfolio of funds in a disciplined way.

Finally, what have other LPs had to say? Surprisingly the phone has been pretty silent when it comes to calls from other investors. Boldt takes a pragmatic view of the reasons why: ?It's still a competitive world out there for investors: if you want to get into some key funds its best not to rock the boat so I'm not surprised that there has been no overt expressions of support from other limiteds.? What about CalPERS, have they called? Officially, it seems not. UTIMCO may not be a lone voice in the wilderness quite, but it nonetheless has the limelight pretty much to itself at the moment. And there are a lot of eyes upon it.