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November 14, 2002
The Complexities of Venture Capital Investment Disclosure
    by William Baue

The University of Texas' disclosure of information on its venture capital investments creates challenges for venture capital firms and institutional investors.

Institutional investors often make private venture capital investments with portions of their portfolios. The venture capital firms that typically handle these investments routinely require these institutional investors, called outside investors or limited partners, to sign confidentiality agreements. These agreements prevent the disclosure of information that could compromise the performance of the investments or tip off other investors about the investments' strategies. However, these confidentiality agreements also keep other information about the private investments, such as social and environmental performance or ethical status, cloistered.

This veil of secrecy has been lifted at the University of Texas, whose $13.2 billion endowment is one of the country's largest school endowments. On September 25, Texas Attorney General John Cornyn ordered the University of Texas Investment Management Co. (UTIMCO) to disclose comprehensive information about all of its investments. The impetus for the order came from a request for disclosure made by the Houston Chronicle under The Freedom of Information Act (FOIA). The Houston Chronicle reported in 1999 on $500 million in UTIMCO investments made through firms linked to university regents or George W. Bush, then-governor of the state. On October 4, UTIMCO made "full and fair disclosure to the public" of information about all its public equity and private investments.

The issue of forced disclosure of private equity investment information has been met with reactions at both extremes of the spectrum. Disclosure advocates applauded the development on the grounds that greater transparency promotes greater accountability. However, many venture capital firms have threatened to file legal proceedings to block the disclosure of information about their private investments. In addition to compromising performance or revealing strategies, such disclosure breaks existing confidentiality agreements. It also paints a distorted picture of investment performance, as venture capital projects tend to mature over a number of years, with early performance often seeming very weak. Venture capital firms fear that the University of Texas (UT) decision could create a snowball effect as other institutional investors may be compelled to follow suit.

The UT decision may be just the beginning of trouble for public institutional investors and their venture capital partners. Indeed, the Massachusetts Pension Reserves Investment Management Board (MassPRIM), which manages $27 billion in retirement funds for state teachers and employees, has received FOIA requests for information on its private equity investments. The California Public Employee Retirement System (CalPERS), which manages approximately $135 billion in assets, similarly has received FOIA requests.

But the issue is not limited to public institutions. For example, Yale University has been under pressure from its students and unions to address potential social and environmental concerns of its private equity investments. Yale's Advisory Committee on Investor Responsibility (ACIR), which is composed of students, alumni, staff and faculty, acts in an advisory capacity to the Corporation Committee on Investor Responsibility (CCIR), which is composed of Fellows of the Yale Corporation. The ACIR evaluates shareowner resolutions and makes recommendations on how to vote them to the CCIR, which typically abides by the advice. The Yale Investments Office, directed by David Swenson, oversees all of the university's investments, both public and private.

Up until recently, the ACIR only reviewed Yale's public equity investments. This past summer, Yale University announced that it would expand the committee's responsibilities to cover private investments as well, according to Yale Office of Public Affairs Spokesperson on Institutional Issues Tom Violante. However, the ACIR has limited ability to evaluate the social, environmental, or ethical status of any of Yale's investments.

"I still don't think we'll have any oversight powers," said Jack Dafoe, one of two Yale students on the ACIR, commenting on the expansion of the committee's responsibilities to cover private investment. "Historically, these powers have been internal to David Swenson's office." Mr. Swenson's office said that he does not make public comments to the press.

So long as oversight power resides behind closed doors, it will remain very difficult to evaluate the social, environmental, and ethical status of private equity investments. However, UT's recent decision to disclose information about all its investments may bring increased scrutiny of venture capital investment by both public and private institutions, whether they like it or not.


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