US university asks court to think again about disclosure ruling

The University of California has asked a state court to reconsider a recent ruling forcing the university to release the financial performance results of its investments in venture capital funds.

( The University of California has asked a state court to reconsider a ruling made two weeks ago forcing the university to release the financial performance results of its investments in venture capital funds, citing two recent incidents of venture capital firms shutting out investors with disclosure policies.

The court papers cited US venture capitalist Sequoia Capital, which recently asked the University of Michigan to withdraw as an investor from its new Sequoia XI fund and sell interests in all previous Sequoia funds, saying it objected to the university’s disclosure of performance and other data Sequoia considers confidential.

“Negative consequences of this court’s decision to the university’s ability to invest have already been felt,” University Treasurer David Russ said in a declaration filed with the motion.

In addition to its concern over Sequoia’s treatment of the University of Michigan, the court papers cited recent negotiations with venture capital firm Three Arch Partners. Three days after the state court ruled that the university must disclose performance figures, the venture capital firm told the university that it was not welcome in the fund.

Three Arch confirmed to Bloomberg it told the University of California on July 27 that the university system can’t invest in its new fund. But founding partner Wilfred Jaeger said the decision wasn't related to the court's opinion, insisting his firm “didn't have room” for more investors.

Jaeger said disclosure rules could influence future fund raisings. “If that's the distinguishing feature between investors, we probably would take that into account,” he told Bloomberg.

Sequoia, which closed Fund XI on $375m earlier this year, had to all but beat back prospective limited partners with a stick to keep below its $400m cap. Each of the limited partners in the new fund had to be satisfied with allocations that were significantly less than the amount they wanted to invest, according to industry sources.

The demand for access to Sequoia is widely seen as a “flight to quality” in the private equity industry, where investors seek out the few firms with solid, long track records.

Of the 1990s-era funds (excluding 1999) that the University of Michigan invested in, Sequoia had the third-best overall performance, according to IRR data released by the university for the period ended June 30, 2002. The only firms to outperform Sequoia were Kleiner Perkins Caufield & Byers (an average of 149.3 per cent) and Matrix Partners (an average of 369.5 per cent).

According to the San Jose Mercury News, after dumping the university, Sequoia later accepted Michigan back as an investor, but it changed its mind again late last month. Sequoia also asked Michigan to sell its stakes in six older Sequoia funds raised between 1990 and 2000.

The University of California’s motion to block the releasing of its IRR data was filed in Alameda County Superior Court.

In December, both the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement Fund (CalSTRS) announced they would release their private equity investment performance data in order to settle lawsuits with the San Jose Mercury News.

The newspaper then teamed up with the Coalition of University Employees, a clerical workers union representing 18,000 employees, and Charles Schwartz, a professor emeritus at UC Berkeley, to file suit against the University of California over the school’s refusal to release fund-by-fund private equity performance data.

The suit also asks for records of various closed-door sessions related to investment and advisor selection decisions.

The Mercury News said it filed a written request in October, citing the Public Records Act, but the university refused to disclose the information, saying that confidentiality agreements it had signed exempt it from the disclosure law. The suit argues that since the University of California receives money from the state, it is subject to disclosure laws.

The lawsuit also seeks records of closed sessions UC held in 2000, when it adopted a new asset allocation plan and hired an outside adviser, Wilshire Associates, and in 2002, when UC fired its inside investment staff and voted to hire multiple outside advisers.

The University of California has more than $800m with private equity firms including Sequoia and Kleiner Perkins Caufield & Byers. The university’s private equity investments rose more than 32 per cent per year during the past five years, compared with the 8.4 per cent annual gain of its stock market benchmark, according to the treasurer’s annual report.

Public disclosure has become a major issue in the post-ENRON business environment, where demands for greater transparency are not easily reconciled with the private component of private equity.

In April, Texas Attorney General Greg Abbott ruled the University of Texas Investment Management Co. (UTIMCO) must release its investment records, including the performance of private equity funds in which it is a limited partner.

Another institution feeling the heat is the Massachusetts’ Pension Reserves Investment Management Board (MassPRIM), which has approximately 6 per cent of its $27bn in assets committed to private equity. Responding to requests filed last year under Massachusetts’ Freedom of Information Act by two individuals, A.L. Mark O’Hare and Scott Wynet, the state’s Attorney General, Thomas Reilly, ruled in June the board must release information on the returns of its venture capital and private equity investments.

The board is continuing to fight disclose on the grounds the figures involved are 'trade secrets,' and could potentially compromise future investments if released.