Full disclosure: we here at PERE are big advocates of public records access. Therefore, it’s always worrying when there are proposed legislative changes that could make it more challenging to access information. That is precisely what is happening in the Golden State, where a bill has been introduced to expand what information legally can be exempt from public disclosure.
Under the existing California Public Records Act, the state’s public pension plans are exempt from disclosing information on their alternative investments, which currently are defined as investments in private equity funds, venture funds, hedge funds and absolute return funds. The proposed legislation (AB 382), which is sponsored by Assembly member Kevin Mullin, would expand alternative investments to also include private real estate investments.
AB 382 is intended to make public pension systems more competitive by not disclosing sensitive information regarding potential real estate investments. However, the bill makes public pensions in California look more than a tad hypocritical. These same investors, after all, have been very vocal about demanding more detailed and frequent reporting from GPs while also touting themselves as being more transparent.
Transparency is not an issue to be taken lightly. Indeed, the largest California pension plan, the California Public Employees’ Retirement System (CalPERS), was sued in 2010 by the nonprofit group First Amendment Coalition for failing to release documents relating to its $100 million loss on a real estate investment in East Palo Alto, California.
Robert Van Der Volgen, chief counsel at the Los Angeles County Employees’ Retirement Association (LACERA) – one of the driving forces behind the bill – asserted that the legislation wouldn’t change LACERA’s current public disclosure practices because it applies to information that the pension plan normally would withhold anyway.
Under the current law, a pension plan can decline a public records request for sensitive information using the so-called catch-all exemption, or balancing test, where the benefit in nondisclosure is believed to outweigh the public benefit in disclosure. Explaining and getting people to understand the balancing test, however, can be a difficult task. “It doesn’t have the same clarity as a list,” said Van Der Volgen. “I don’t have a specific provision to point to and say that the due diligence is protected.”
Among the records that will not be subject to disclosure under AB 382 are due diligence materials; quarterly and annual financial statements of alternative investment vehicles; meeting materials; information about the portfolio positions in which the vehicles invest; capital call and distribution notices; and alternative investment agreements and related documents.
While LACERA is “fairly religious” about responding to public records requests and considers a failure to do so a violation of the Public Records Act, not every California pension plan is so diligent. Indeed, the interpretation and implementation of the Public Records Act already seems to vary widely among these investors, and it would not be at all surprising if some were to become even less transparent if the bill were to be enacted.
Then there’s the issue of competitive disadvantage. The premise for AB 382 is that public disclosure would hurt a general partner because the GP considers certain investment-related information to be trade secrets that would give them a leg up on the competition. If those records are released into the public domain, competitors could ‘outbid’ that GP on a property investment or on fund terms. If a GP is outbid, that could adversely affect the performance of that investment or fund and, ultimately, the returns for the pension plan.
“This is a big problem,” one non-California pension plan told PERE. “Depending on the asset class and the general partner in question, GPs would not just be skittish but would altogether avoid dealing with potential LPs with disclosure requirements in favor of LPs that have fewer or no requirements.”
It is true that, in a normal fundraising environment, some GPs would avoid certain public pensions for those reasons. However, the industry currently isn’t in normal times, and many GPs are hard-pressed to raise capital. Because of this, it’s doubtful that most firms would refuse money from a US public pension plan, especially since every state has some form of public records legislation.
LACERA’s Van Der Volgen noted that the confidentiality of documents always is “a sticking point” whenever the pension plan is negotiating with a GP. However, he acknowledged that “the confidentiality issue hasn’t killed a deal…I don’t think anyone’s turned our money away.” One GP that counts California pension plans among its LPs agreed, adding: “I doubt we’ll quit any pilgrimages to Sacramento.”
To take that point further, in many cases, public disclosures actually could benefit the GP since the LP indirectly would be helping to publicly promote and market a fund in revealing its rationale for making that investment. If a GP is more successful in its capital-raising and investment efforts, that ultimately would benefit its LPs as well.
We at PERE aren’t trying to dismiss concerns about the potential consequences of public disclosures. We do think, however, that the flip side of the issue has been overlooked in the drafting of the bill. Transparency, after all, should be viewed as a two-way street.