What began as a showdown between a Texas newspaper and a local venture capital firm has ended with the state getting a badly needed update to its public disclosure laws. Private equity professionals in Texas and beyond are breathing a sign of relief that a recently enacted amendment regarding public body investment information appears to protect the most sensitive information to a private equity fund.
Industry professionals who follow the so-called FOIA issue also hope that the new Texas law will serve as a model for other states facing similar battles.
?The Texas statute is one of the best in the country in terms of providing specificity,? says Carl Metzger, a partner in the Boston office of law firm Goodwin Procter. ?At the end of the day, specificity is what private equity firms wanted. The hardest thing was not knowing where the line would be drawn.?
Adds Metzger: ?Most private equity firms should be comfortable with where the line has been drawn.?
On June 18, Texas governor Rick Perry signed into law Senate Bill 121, which specifies a citizen's ?right of access to investment information of governmental bodies.? The new law describes 16 types of information that a private fund with capital from a public entity must disclose, if such information is requested (see article, next page).
The bill was introduced at the behest of the state's private equity investors and fund managers, who feared that Texas' existing public disclosure laws would allow third parties to access sensitive information regarding portfolio companies. The issue began with a suit brought against the Texas Growth Fund by a local newspaper seeking to write an expose on state funds squandered in bad investments.
The cause of full disclosure was then taken up by the state's attorney general, Greg Abbott, who ruled that Texas Growth Fund had an obligation to share with the public details of its investment portfolio. Texas Growth Fund, joined by the $86 billion state Teacher Retirement System, then sued Abbott's office to block the disclosure.
The Texas Growth Fund suit remains ongoing, but the new disclosure amendment appears to have done much to settle the issue of what can be disclosed and what can't. The clarity didn't come a moment too soon – in the span of time between attorney general's ruling and the enactment of the law, Texas' handful of large, sophisticated institutional investors in private equity had been gradually becoming corpus non grata among GPs, who feared that a commitment from a Texas institution would mean front-page coverage of portfolio secrets.
In May, for example, highly regarded Texas venture capital firm Austin Ventures closed its $525 million Fund VII without a dime from any public Texas institutions, which include the pioneering University of Texas Investment Management Company (UTIMCO), the teachers' pension, and the Houston Police Officers'Pension System.
State senator Robert Duncan, who was an author of SB 121, said it would ?strike a balance between tax payers' need to know how their money is invested and the confidentiality needed to protect proprietary information.?
Although the disclosure amendment is the product of compromise, there may be some sore points for GPs. Metzger notes that information category 9 seems to have been the biggest compromise for fund managers and it has nothing to do with portfolio company data. The disclosure category calls for: ?The total amount of fees, including expenses, charges, and other compensation, assessed against the governmental body by, or paid by the governmental body to, any fund or investment entity or principal of any fund or investment entity in which the governmental body is or has invested.?
General partners are loath to disclose publicly what kind of fees they are paid by specific limited partners. The statute's language covering this issue seems to indicate that the disclosure of a total dollar amount is acceptable, which for most GPs is far preferable to a disclosure of specific fee terms. Also unstated is whether the carried interest received by a GP group must be disclosed. ?Does the language include carry?? asks Metzger. ?That is open to some debate.?
Also open to debate is what exactly must be disclosed about a portfolio company. The law calls for ?a description of all of the types of businesses? in a fund. It is not specified whether a ?description? in this sense must include the name of the business. ?All of these statues are subject to interpretation that can vary based on which way the political winds are blowing,? says Metzger.
Still, the new language is far more specific than that governing existing disclosure law in Texas and in most other states. State ?sunshine laws,? as they are sometimes called, were mostly created in the aftermath of the Nixon-era Watergate scandal, when public trust of the government reached a low and the pressure for better disclosure gained momentum. But the laws created then did not anticipate the participation of government bodies in private investment funds, which have a unique set of ?trade secrets? not readily accepted by legal precedent.
The law has also been met with relief by the private equity community, particularly in Texas. According to an investment advisor, the Texas LPs ?have been tying their shorts in knots over this. They have been uninvited from a number of funds, and a number of funds won't come in to talk to them. They've seen diminished deal flow.?
The development in Texas may also bode well for similar legislation in other states. In California, for example, the mighty California Public Employees' Retirement System has backed the creation of Senate Bill 439, which states that ?a certain narrow class of public investments, alternative investments, involves some information that historically has been keptconfidential because confidentiality is essential to their success.?
Unlike the new Texas amendment, the California bill defines what is not disclosable from a private investment fund, specifically: due diligence materials; quarterly and annual financial statements; meeting materials; portfolio company investment data; capital call and distribution notices; partnership agreement documents.
Similar legislation has already been passed in Colorado, Michigan, Massachusetts and Virginia. With each new public disclosure law comes a sense of confidence from GPs that the public institution in those states will not turn over sensitive portfolio-level data.
Still, the investment advisor points out that while the beleaguered Texas LPs have certainly been uninvited from several funds, it is unclear what ultimate effect this will have on performance. In addition, he says, many private equity firms are still grateful to get public capital, even if it means some of their cherished data may be in jeopardy. ?Never underestimate the power of greed,? he says. ?Texas Teachers is investing close to a billion dollars per year. And GPs want a lot of money.?
AUSTIN FOIA LIMITS
Below is an excerpt from the recently enacted Section 552. 0225 amendment to the Texas Government Code, entitled ?Right of access to investment information.? The amendment specifies 16 categories of information related to private funds that may be publicly disclosed.
The following categories of information held by a governmental body relating to its investments are public information and not excepted from disclosure under this chapter: