The true beginning of private equity's struggle with public disclosure was marked not by any dispute between a newspaper and a public pension, but by a dispute between a newspaper and a sitting president of the United States.
It all started, really, with the Washington Post's investigations into corruption in the Nixon White House, which led to the Watergate scandal and subsequent rise in cynicism toward public officials. In fact, the Freedom of Information Act was signed into law by Nixon's predecessor, Lyndon Johnson. But following Watergate, the Act was amended in 1974 to make it more powerful and far-reaching. Many states then passed open-record laws of their own.
Fast forward to the present. The public has not lost its cynicism toward public officials, but public institutions now engage in a peculiar activity not seen in 1974 – they invest in private partnerships. These funds will argue that as investors, the public institutions are privy to trade secrets that partners should not reveal. But the open-record laws of yesteryear do not specifically address this new activity. Hence the constant testing, probing and viral mutation that characterises the current so-called FOIA battles.
Take the case of CalPERS, for example. Just as the pension thinks it has resolved one Public Records Act issue, another one pops up.
In October 2000, the California Public Employees' Retirement System began quietly posting quarterly performance data on its private equity partnerships. The simple reason for this move was that the pension had grown tired of sending this list to those who requested it, so CalPERS decided to make it permanently available on its website.
After hearing from enough displeased GPs about the decision, the pension took the IRR numbers back down in 2001. Then it was sued by the San Jose Mercury News to put the list back up. After a drawn out legal battle, the pension acquiesced and in 2003 reposted its spreadsheet of fund-level IRRs.
But alas, the FOIA furies came back in a different form. In September, CalPERS was sued by a separate group, the California First Amendment Coalition (CFAC), and for a new type of data – management fees paid to its underlying partnerships. After conferring with legal counsel, CalPERS struck a balance similar to that found in its performance disclosure solution. In October, the pension provided to the CFAC a list of dollar amounts charged to CalPERS by its various general partners, according to a communication the pension's alternative investment staff sent to all its partners. But the more sensitive information – management fee terms – was not revealed.
Mutation. The CFAC then hit the pension with another request, this time for the dollar amounts of the carry that CalPERS general partners had paid themselves. The pension responded that this information was exempt from the Public Records Act, and anyway it didn't keep specific information in this regard.
Transmogrification. The CFAC came back with yet another request – it now wanted dollar amounts of gain received annually by CalPERS from all of its private equity and hedge funds.
A notice sent last month to CalPERS' general partners informed them that the pension will now make publicly available a spreadsheet with the dollar amounts of profit attributable to each fund. The CFAC will get the first of these on December 6. Again, CalPERS will withhold partnership terms, carried interest information and specific portfolio company information.
Where clear laws do not exist regarding what can and can't be disclosed, expect more of the same both at CalPERS, across the US and beyond. FOIA battles now involve new data requestors such as labour unions, expanded types of information requested, such as management fees and – in Texas – portfolio company data. The debate looks set to move to the UK and Europe (see p. 51), where data-seekers may find sensitive private equity information in new and unusual ways.
If you're looking for someone to blame for all this, you could start with Richard Nixon.