The University of California could be forced to disclose closely guarded information on the investment performance of venture capital funds managed by Kleiner Perkins Caufield & Byers and Sequoia Capital after a judge last week allowed a lawsuit over the issue to move forward.
The lawsuit, filed in California state court in Oakland by Reuters America, a unit of Thomson Reuters, argues that the state Public Records Act requires disclosure of specific investment-return information for the university system's $10.65 billion endowment fund.
The university says the investment-performance information for the individual funds is not in the public record because it does not have the data. It says it only receives aggregate data on its holdings in multiple funds run by the two firms -- a structure the lawsuit alleges is designed to avoid disclosure.
The lawsuit illustrates the conflict between the desire of public investment funds to invest with top-tier venture firms and the desire of those firms to keep their performance a secret. Many public institutions now use so-called "blocker" funds that are designed to satisfy disclosure requirements while keeping detailed investment performance data under wraps.
The University of California "takes compliance with the Public Records Act very seriously, and has complied in this case," said Dianne Klein, a university spokeswoman. "We believe the lawsuit is without merit, and will vigorously defend that position in court."
Thomson Reuters counsel Karl Olson said, "If Kleiner Perkins and Sequoia are really the cream of the crop, they should be happy to disclose fund-level performance."
A spokeswoman for Kleiner Perkins declined to comment. A spokesman for Sequoia declined to comment.
California's public-records law, which was amended after a 2003 lawsuit forced the University of California to disclose investment returns, shields some types of investment data from disclosure.
But it explicitly states that other pieces of information, including the dollar amount of the commitment made, the net internal return and the dollar amount of cash distributions received, are not exempt from disclosure.
The Reuters lawsuit, filed in January, stems from a request for individual fund details on the university's investments in Kleiner and Sequoia funds by Mark Boslet, senior editor at Thomson Reuters' Venture Capital Journal and PeHub, an online publication about private equity, buyouts and venture capital.
The university first said it had some of the data, then said it did not, and then provided aggregate data for the Kleiner and Sequoia funds.
Not disclosing information because the university does not have it amounts to flouting public-records law, Thomson Reuters said in its suit. The law "requires certain information to be disclosed and does not allow a public agency to hide behind the excuse that it doesn't keep the information," the suit says.
The suit also says that Boslet asked UC for detailed returns information on Accel VIII, a fund started by Accel Partners in 2000. The university provided information on Accel, allowing Boslet to write a blog post on PeHub dated November 8, 2011 stating that the university had given Accel $11.7 million and Accel had distributed $11.1 million. The university's net asset value in its remaining Accel VIII investment totals $3.1 million.
On its website, the university provides updated individual-fund level returns for all venture funds in its portfolio except the Accel fund, the five Kleiner funds and the five Sequoia funds in which it has invested.
Last week, Judge Evelio Grillo denied the university's motion to narrow the suit. A case management conference is scheduled for May.
Public records laws caused problems for venture-capital firms about a decade ago when many public groups started disclosing returns. Since then, many states have clarified their laws to detail exactly what must be disclosed, and most venture-capital firms have grown used to the possibility that their returns could become public. However, several top venture capital funds generally do not take investments from public groups they believe could disclose their returns, lawyers, consultants, investors and advisers say.
While even those top firms are not in a position to turn down all direct investments of public money, they can limit it to states and institutions with public-records laws and policies they consider favorable. For example, some public universities, such as the University of North Carolina and the University of Virginia, have separate, privatefoundations for their endowments that do not have to disclose returns.
Public money was once the largest source of funds for venture-capital firms, but that has changed in recent years. Public pensions make up just 7 percent of all venture-capital funds, according to Dow Jones LP Source. Today, the largest investor group is sovereign wealth funds, providing 21 percent of funding.
Public investors that do get into the more exclusive firms' funds sometimes have to agree to conditions, such as not receiving written breakdowns on returns at each individual underlying fund or knowing which fund holds which investment, investors and lawyers say.
A common technique is the "blocker" fund, often a type of "fund of funds" that holds investments in many different individual investment vehicles. When a public records request comes in, what comes back is the return for the blocker structure, not the underlying funds that comprise it, lawyers say.
This article is copyrighted by Reuters
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