Congratulations to the University of Texas Investment Management Co., Austin, for releasing the returns of its private equity investments.
Large public institutions like it can help bring sunlight onto the investment record of private equity investment firms.
Lack of transparency is always a concern when billions of dollars are being invested, yet there are few market sectors with less transparency than private equity.
Why should the performance of private equity firms be kept from public view, especially at public funds? Private equity is now only a small part of total assets, but it is growing as sponsors hope to revive overall fund returns in the face of poor public financial markets.
Private equity management also typically takes up more internal resources to evaluate, and costs much more in fees than conventional money management.
Public funds should not cave in to the secrecy demands of private equity managers, who threaten to retaliate by keeping them out of future deals. Contractual relationships with private equity managers shouldn't trump public policy concerns for transparency.
The funds would not be divulging the formula for Coca-Cola or financial information about the private firms, just the returns. And the returns are only appraisals anyway, because the investments aren't traded in public markets.
An executive director for a major public pension fund opposes disclosure of venture capital and other private equity returns beyond performance of the asset class. To do so, he believes, the staff would have to take valuable time away from its preeminent duties of running the pension fund to explain to the public the rationale for using particular private equity managers and the investments they make. But that's the point. Staff, as well as trustees, need to be held accountable. Disclosure is part of the cost of operating a fund. Addressing inquiries sometimes can provide insight to the officials themselves about their own work.
Anyway, does a policy of non-disclosure mean the public is forever precluded from performance information about these managers? Does anxiety about staff members' valuable time include scrutinizing such diversions as any seasonal office parties?
Oversight by trustees, however diligent and otherwise forthcoming in performance details about the rest of the fund, isn't enough, as everyone has been reminded by the recent scandals in corporate America. Public funds have a special burden to keep taxpayers, i.e., voters, informed.
Disclosure will bring greater scrutiny not only to a fund's strategic vision, but also to its selection of the managers and the computation of the returns themselves. It also is likely to improve both the management of the funds, and the measurement of their value.
If returns are poor in the short run, private equity and public fund officials ought to be capable of defending the long-term strategy and of advocating patience.
Disclosure also will help fend off attempts to allocate assets to investments made more because of political influence than potential return.
To avoid disclosure, some private equity managers may refuse public fund allocations. But the big money these funds have will be powerful in assuaging private concerns. Principle has its price, so to speak.
Often, lack of public disclosure may have little to do with retaliation by private equity managers. Many public funds, in fact, could do a better job of disclosing information about their traditional investment managers. Reports from public funds often omit details of portfolio investments or returns of each manager, making it difficult for outsiders to evaluate the oversight of pension fund officials.
With the markets performing poorly, fund officials now more than ever need to reassure their constituents, and participants above all, of the strategic vision for managing the funds. Fuller disclosure of returns would be a good start.