No sweat, no law


American high school students learn an important lesson in civics class – legislatures are structured not to facilitate the passage of new laws, but to prevent frivolous new laws from being passed.

This lesson was not lost on the alternative investment staff of the California Public Employees' Retirement System, which, along with the University of California Retirement System, spearheaded the laborious process of creating and lobbying for SB 438, a bill signed into law in September by Governor Arnold Schwarzenegger.

SB 438, modeled roughly on other similar state laws, specifies which investment information held by public institutions can be kept out of the public eye. The new law is being cheered by California LPs like CalPERS, as well as by GPs everywhere, because it keeps off limits from so-called FOIA requests portfolio company financial information as well as other sensitive items like due diligence materials.

Panda Hershey, an investment officer with CalPERS who focuses on private equity funds, was instrumental in pushing SB 438 through to law, according to a GP source. Hershey calls the process a ?team effort.?

Hershey says the investment staff had a true advocate in the form of CalPERS government affairs specialists and internal legal counsel, who first helped the pension pick a state senator to sponsor the bill. Senator Joe Simitian was a logical choice, as his constituency spans the whole of Silicon Valley and surrounding areas.

Next came the drafting of the bill, which involved negotiations with proponents of open government, including the California First Amendment Coalition, a frequent FOIA activist and critic of secrecy in private equity. Panda explains that CalPERS and Simitian didn'twant to submit legislation that would be automatically opposed by the CFAC. ?There had to be consensus about language, says Hershey.

With a carefully crafted bill in hand – which carved out specific aspects of private equity programs that could and could not be exposed to the public – the CalPERS team began to lobby California state legislatures. Hershey herself joined the lobbying on a number of occasions. ?I marched the hall, says Hershey, referring to the corridors of the California capitol building in Sacramento. ?It was very interesting.?

SB 438 passed without a single ?no vote from either house or from either party. General partners may not like every detail of it, but at least it applies some glue to the slippery slope of FOIA requests in the state. Expect similar legislation to be signed into law across the US.

NVCA posts revised model documents
The National Venture Capital Association last month released revised model legal documents on its Web site. The model documents – meant as standardized templates for venture capital financing transactions – were first released earlier this year (see feature p. 22). The model documents include a Term Sheet; Stock Purchase Agreement; Certificate of Incorporation; Investor Rights Agreement; Voting Agreement; Right of First Refusal and Co-Sale Agreement; Management Rights Letter; and Indemnification Agreement. Each model document was produced by teams of legal experts drawn from US law firms and several academic institutions.

UK pensions deficit hits private equity
Two-thirds of private equity firms active in the UK have backed out of a deal due to a company's pensions deficits, according to new research from specialist M&A consultancy Punter South all Transactions Services. The report, The Market Value of Pension Liabilities, found that all the firms surveyed had encountered pensions problems at some point, and that 88 percent of them claimed to have faced them frequently. Forty percent of firms said that they spent between £15,000 (€22,000;$26,000) and £30,000 on pensions due diligence, while a third spent over £30,000. The survey was commissioned to research how UK capital markets price pensions obligations of companies with defined benefits schemes. The firms surveyed believe that equity markets provide the most beneficial pricing for companies with pensions deficits. A third of the firms said that an IPO would be a favorable exit option, as it does not focus on pension deficits. The remaining two-thirds said that trade buyers were the best option as they can absorb the deficit. In a statement Paul Geeson, a principal at Punter South all Transaction Services, said that companies with significant pensions deficits are almost immune to hostile takeovers because the equity market does not fully reflect the deficiency whilst the suppliers of capital to private equity houses treat it as a debt. ?Poor management have an incentive to underfund a pension scheme to prevent the company being taken over and the threat to their jobs that this presents, he said.

IRS revises spin-off rules
The Internal Revenue Services in September announced that it would give expedited processing to private letter ruling requests for spin-off and reorganization transactions. According to a client memo from international law firm Debevoise & Plimpton, the announcement stands in contrast to the typically four-month wait for private rulings in these matters. The memo noted that at a recent meeting of the New York State Bar Association Tax Section, IRS officials indicated that ruling requests on spin-offs had declined more than the service expected. The IRS had considered these rulings an important means of keeping abreast of the market, and therefore ?one would expect the IRS will devote resources necessary to give spin off and reorganization rulings priority attention, according to the Debevoise memo.

BVCA survey finds member caution
According to a regular survey conducted for the British Venture Capital Association, market participants in the UK overwhelmingly do not expect business climate improvements in the near future. The survey, conducted quarterly since 2003 by YouGov, found that 60 percent of BVCA members predicted no change to the business environment over the next three months, while 29 percent predicted a deterioration in conditions. This represented a sharp drop in optimism from the previous quarter's survey. By contrast, the same survey, conducted in June, found that most members were pleased with the fundraising environment. Fully 56 percent of respondents felt that over the past three months, the climate for fundraising had been either fairly or very favorable – the highest point of fundraising optimism since the survey's inception.

UK launches ?enterprise capital funds?
The UK government has engaged in an initiative to ?bridge the equity gap for British companies seeking funds, according to a client bulletin by SJ Berwin law firm. The effort will involve the formation of Enterprise Capital Funds (ECF) – comprising both public and private capital – to back UK companies short on capital. These funds are expected to be launched in early 2006 and be operated by selected fund managers. The ECF project is seen as a UK government experiment to support the development of companies without violating European prohibitions on state aid. Other governments in Europe interested in promoting local ventures are said to be closely observing the process and results of the ECF scheme.

NVCA lobbies for biotech grants
The NVCA has begun lobbying the US Congress to pass legislation that would allow venture backed startups to receive Small Business Administration Small Business Innovative Research (SBIR) grants, from which they are currently exempt. It is encouraging members to send letters to members of congress stressing that even though early stage biotechnology companies backed by venture capital firms have access to capital, they would still benefit from SBIR grants. The Small Business Administration recently redefined eligibility requirements for grant recipients such that small companies that receive private financing are no longer eligible. A bill called Save America's Biotechnology Innovative Research Act redefines eligible SBIR grant recipients as including concerns that are at least 51 percent owned by an individual or venture capital firm. Kelly Slone of NVCA's medical industry group is coordinating the association's letter-writing campaign.

EVCA appoints professional standards chairman
TVM's Helmut Schuhsler will replace ABN AMRO Capital Finance's Hervé Claquin as head of the EVCA's professional standards committee. Claquin, chief executive officer of ABN AMRO Capital Finance, has held the position since 2001. Schuhsler has worked in the venture capital industry for 18 years, the last 15 of which have been spent overseeing TVM's investments in the life sciences sector. Prior to TVM, Schuhsler was an investment manager at Horizonte Venture Management in Vienna. The committee develops and reinforces professional standards for the private equity and venture capital industry in Europe. Key initiatives for the committee for the coming year include promoting the adoption of new corporate governance guidelines for the management of privately owned companies as well as the International Private Equity and Venture Capital Valuation Guidelines. The EVCA, British Venture Capital Association (BVCA) and Association Francaise des Investisseurs en Capital (AFIC) jointly released the International Private Equity and Venture Capital Valuation Guidelines in March this year.