AUSTIN, Texas - The public release of private equity returns by the University of Texas is rippling through the industry and could open private equity and venture capital investments to unwelcome public perusal.
Already, tax-exempt institutional investors in Massachusetts, California and Connecticut are being pressured to make similar disclosures. At the same time, there are signs the private equity industry is considering a unified effort to combat what is expected to become a trend.
In UT's case, despite the objections of general partners and its fellow limited partners, the University of Texas Investment Management Co., Austin, bowed to political and media pressures and released the performance of 149 private equity funds.
UTIMCO is a public agency set up in 1995 to oversee the combined $14 billion Permanent University Fund, endowment and operating funds.
Following the UTIMCO decision, the Massachusetts Pension Reserves Investment Management Board, Boston, received requests to disclose performance information about its approximately $1.6 billion private equity portfolio. In addition, a spokesman for the University of California, Oakland, said its treasury officials are currently "in conversations" with the university's private equity managers about how to disclose investment return information on its approximately $1 billion private equity portfolio.
At Yale University, New Haven, Conn., the Texas decision heartened the university's unions in their efforts to obtain detailed information about the private equity investments in the university's $10 billion endowment. Private equity allocations at Yale amount to about 18.2% of assets, compared with 15.5% in public domestic equities. A report by the Federation of Hospital and University Employees at Yale blasted the endowment's private equity program, claiming it is "shrouded in secrecy" and "out of sync with Yale's internal investment policies."
Antony Dugdale, research analyst at the federation, said he hopes the UTIMCO decision will help his group's cause, although the group was unaware of the Texas decision when it issued the report. He said since Yale is a private institution, it may be more difficult to obtain disclosure than in public entities like the University of Texas, University of California and Massachusetts PRIM.
"We are hoping that Yale will do the right thing and follow the lead of the $14 billion University of Texas system," said Mr. Dugdale. "Yale has led the way on other issues, like combating apartheid in South Africa, not because of legal demands but because it was the right thing to do."
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Private equity managers, meanwhile, are nervous about the disclosure movement and are reluctant to discuss the issue.
What is not clear is whether the Texas decision will lead to a division in the private equity industry between managers that refuse to accept business from investors that disclose information and those that do not.
"There could be a bifurcation of private equity firms between those willing to work with public funds and those who won't," said Bob Boldt, UTIMCO president and chief executive officer,
That, of course, might hurt investors, which could be shut out of some established private equity funds that don't want to deal with disclosure.
Others disagree that transparency is the bane of private equity investments.
Charles Miller, chairman of the University of Texas Board of Regents and retired founder of Criterion Investment Management Co., Houston, said disclosure and transparency "will not lead to the ruination of the private equity business."
"I'm not sure the private equity industry would do itself well by continuing to hold that position (confidentiality of all information). It would not be in their best interests, or ours. There is not doubt that they will have to back away from that. The industry needs to catch up with the world the way it is," said Mr. Miller, who was instrumental in UTIMCO's adoption of "full and fair" disclosure.
Officials at most private equity firms declined to talk about the disclosure issue or refused to return calls seeking comment. But one, who requested anonymity, agreed that disclosure is inevitable.
"I'm surprised, honestly, about the uproar and the depth of feeling," he said, noting some members of the private equity community are talking about joining collectively to combat disclosure efforts. He declined to say who was organizing the anti-disclosure movement but said his firm has been approached about participating. He said a few managers are "making noise" about taking legal action to maintain confidentiality, but no lawsuits have been filed.
That the disclosure issue could divide the industry "is possible, but not likely," he said, because a large portion of new cash flow into private equity funds comes from public funds. The only exception might be in certain venture capital funds where "there is more ability to decide who gets in."
"I find it hard to believe in this day and age that transparency isn't the right thing. There will be a lot more pressure to do it. Transparency is inevitable," he said. "We believe the numbers should be out there."
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Disclosure will bring on a different set of problems, he said, because there are no standardized consistent reporting requirements for private equity investments and "people are likely to be less honest about how they report if they know the information will be disclosed."
"There is no accepted way to report returns, no consistency, and there are a lot of apples and oranges," he said. Disclosure is especially problematic for younger firms with short track records because most private equity partnerships and deals take several years to mature and deliver excess returns.
While performance and return information should be fair game, he said the line should be drawn on disclosing information on underlying portfolio companies. "We aren't worried about aggregate return information, but for the underlying portfolio companies we don't necessarily want their operating data disclosed. Some (private equity firms) use that as a reason for not releasing aggregate returns or any information," he said.
A private equity manager who runs money for the Massachusetts PRIM Board said PRIM is facing disclosure issues similar to those Texas faced, and disclosure by private equity firms is inevitable. She said principals in her firm were "appalled" by the disclosure efforts in Texas "because this has been so private for so long." Now, she said, private equity managers should prepare themselves for a degree of disclosure. Both private equity managers agreed they would not restrict investments in future deals based on disclosure requirements.