Document release fuels different kind of private equity disclosure fear

OAKLAND, Calif. — The release of private equity documents to a union involved in a year-long employee boycott of two luxury California resorts has the private equity community in anything but a relaxed mood.

The Hotel Employees & Restaurant Employees Union Local 2850, AFL-CIO, Oakland, Calif., has been boycotting Claremont Resort and Spa in Berkeley, Calif., and The La Costa Resort and Spa in San Diego since contract negotiations at each site broke down a year ago. The resorts are owned by KSL Recreation Group, LaQuinta, Calif., a subsidiary of Kohlberg Kravis Roberts & Co., New York. Union employees at Claremont have been working without a contract since 2001; the La Costa contract expired last year. KSL officials wanted to cuts health care costs for hotel employees.

Along with the current debate in the industry concerning public fund disclosure of private equity performance, the KSL-union issue raises another concern for private equity firms: the use of documents by unions to prove that a portfolio company, in this case KSL, could afford to pay for benefits such as health care for union workers it employs.

Union officials in October sought information on KSL's funding, of which 95% comes from limited partners — and the majority are public pension funds. The $52 billion Washington State Investment Board, Olympia, the largest limited partner, was targeted with a Freedom of Information Act request from the union as part of its investigation into KSL and its relationship with the fund's board members, said Andy Lee, research analyst for the union.

"We routinely research the companies that employ significant numbers of our members," Mr. Lee said.

In response, Scott Huntley, WSIB legislative and communications coordinator, released to the union in November a 2,000-page treasure trove of secret private equity documents, including those related to the fund's private equity investments with KKR — partnership agreements; quarterly reports on the fund's private equity investments by the board's adviser, Pacific Corporate Group; staff recommendations and annual reports. All Mr. Huntley's correspondence included carbon copy notations to Thomas Ruggels, WSIB senior investment officer, private equity, and Les Brodie, the system's former acting deputy director for operations.

Two months after the documents were released, the WSIB board wrote Mr. Lee, asking him to return the documents, and to avoid copying or releasing them to anyone.

"The release of these documents was premature and may have included release of information that is considered confidential and nondisclosable under state law and under agreements with investment partners," wrote Patrick McElligott, investment board chairman.

Mark Heesen, president of the National Venture Capital Association, Washington, said unions and media could swamp public pension funds with FOIA requests on private equity investments, and funds' communication employees charged with responding to the requests may not see the distinction between public stock information and confidential private equity information. "I could see individuals browbeat pension funds to get this information," Mr. Heesen said.

The cache of documents, released over a period of months, included limited partnership agreements between the Washington board and four of KKR's funds; the WSIB's private equity investments log; UBS Brinson's investment recommendation regarding the board's KKR Millennium Fund commitment; the 2000 and 2001 annual reports for each KKR fund; and the Dec. 31, 2000, KKR portfolio summary.

Once they realized what had been released and the union refused to return the documents right away, KKR and WSIB officials secured a temporary restraining order in Washington state court, forcing the union to return the documents so sensitive information could be removed. Once returned, the state's attorney general's office began responding to the union's FOIA request the way officials there say it should have been done in the first place, with everything but top-level return information removed, explained Joe Dear, WSIB executive director.

"The release of information occurred during my second week as executive director," Mr. Dear said. "I asked whether anyone had checked with the general partner. A mistake was made in not letting them know both as good practice and by contractual obligation."

Mr. Dear said he expects that the board to adopt a policy on disclosure of private equity information by December.

"It was embarrassing to make the mistake, but we acted with determination to correct it," Mr. Dear said. "I am confident we have administrative controls in place."

"KKR appreciates how swiftly the Washington State Investment Board acted in recognizing its responsibility to retrieve these confidential documents," said Molly Morse, a KKR spokeswoman.

In April, union officials circulated a white paper authored by Mr. Lee purporting to outline questionable business practices of some of the companies in KKR's portfolio. The paper claimed KKR was involved in a conflict of interest because it received millions of dollars in fees as a financial adviser to KSL, which is not only a subsidiary but one of KKR's portfolio companies, and called on KSL executives to search for another adviser who could supply those services at a lower cost.

The white paper, "The Inside(R) Scoop, Related Party Transactions at KSL Recreation," was sent to limited partners in some of KKR's funds, Mr. Lee said. The institutional investors included: the Washington board; California State Teachers' Retirement System Illinois State Board of Investment; Teachers' Retirement System of Illinois; Los Angeles City Employees' Retirement System, Los Angeles County Employees' Retirement Association; Massachusetts Pension Reserves Investment Management Board, Minnesota Board of Investments; Montana Board of Investments; New York State Common Retirement Fund; Oregon Investment Council; State of Connecticut Trust Funds; State of Wisconsin Investment Board; and the State Universities Retirement System of Illinois.

"These pension funds largely come from unionized public sector workers," Mr. Lee said. "For these particular funds, the fact that they are putting these pools of money from union members in a company … which has been buying companies and turning them around by lowering wage and benefits, we think it's a questionable thing to do."

KKR responded in June with a long letter by John K. Saer Jr., a former director of KSL who is now a partner of KKR, calling the work "disappointing, inaccurate, sloppy and misleading."

"It's a crude attempt to pressure KKR into pushing KSL to enter into labor agreements that would be detrimental to the interests of our limited partners, and it won't work," Mr. Saer wrote.

So far, only the Wisconsin board has responded. "While it appears that most of the related-party transactions you listed were disclosed, we will want to evaluate whether they violated duties owed to investors in the KKR 1996 Fund," wrote Keith Johnson, the Wisconsin board's chief legal counsel in a letter to Mr. Lee.

Calls to Mr. Johnson and Patricia Lipton, Wisconsin board executive director, were not returned by press time.