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.
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.