The pension funds of Verizon Communications Inc. and Alcoa Inc. might share the riches in YouTube Inc.'s acquisition by Google Inc. for $1.65 billion.
The funds are investors with Sequoia Capital Partners, a venture capital firm that could reap $495 million from an $11.5 million investment in YouTube, the company providing video-sharing on the Internet.
It is unclear whether the funds are investors in the specific Sequoia fund that held the YouTube position. But if they are, they will have won big for taking a risk in venture capital.
The certain losers, however, are some public pension funds and public university endowments. Executives there may have cringed at what might have been as they learned of Sequoia's apparent bounty from the YouTube acquisition.
Sequoia kicked these funds out, returning investment capital, after it was ruled that freedom of information laws required the funds to disclose sensitive financial details they received about the companies in which Sequoia and other private equity firms invest. Sequoia feared such disclosure would compromise its investment strategy, jeopardizing its ability to generate huge returns.
The public funds are losers only in the sense of opportunity cost. They have lost the opportunity to earn big returns on the YouTube deal.
Perhaps they were able to deploy the money that would have been with Sequoia into other venture capital firms or other investments that will earn returns at least as big as the YouTube deal. But based on the comments of public fund officials in recent years, their funds need access to top-tier venture capital firms to have a better chance to make equally top-tier returns.
In reaction to the freedom of information court decisions, a few states — such as Colorado, Michigan, Virginia, Maryland, Utah and Texas — enacted laws to limit the information public funds must disclose. If, in fact, the corporate funds shared in the YouTube bounty, public fund executives will no doubt pressure legislatures in more states for exemptions to the laws.
Those actions won't necessarily placate venture firms, leading them to rush to reinstate public funds. They may fear that legislatures or courts might sometime undo the new laws.
Top-tier venture firms have such a commanding presence that fund sponsors have to chase them with capital, rather than the other way around. The firms don't need the public funds because they can attract plenty of money from other investors who will keep their mouths shut. In fact, some top-tier venture capital firms recently shut out funds of funds for a variety of reasons.
Transparency is an important issue for public funds, while corporate funds don't face such an issue. But legislatures that create loopholes in freedom of information laws to accommodate private equity firms make it difficult to hold trustees accountable, not only for investment capital but fees and benchmarks and proper risk analytics.
In return they hope to win a lottery in the form of a YouTube-like jackpot. But no venture capital firm can assure winning performance; there are plenty of lottery tickets that come up losers.
There are problems with providing disclosure exceptions.
For one, the law isn't designed only to restrict information of top-tier, and presumed high-integrity, venture capital or private equity firms. It affects all kinds of such investment firms, regardless of their track record or personnel. Lack of transparency leaves too much latitude for possible conflicts of interests or other abuses. Trustees bear responsibility, but keeping them accountable is more difficult without adequate information, although some venture capital firms might be willing to disclose details.
For another, trustees generally keep staffs small. Such staffs might be adequate for traditional investments. But as private equity and other alternative investments gain a bigger allocation, funds are stretched to provide adequate oversight. Legislatures that adopt new laws, as well as trustees overseeing the funds, owe it to the public to ensure that funds' staffs are increased sufficiently to oversee the more intense detail they must give alternative investments.