Private equity funds are some of the most secretive investors around. They rarely publicize returns, and they fiercely guard the specifics of the companies they own.
That confidentiality has come under attack in recent years by media outlets and political groups that want public investment funds to disclose their private equity and venture capital holdings. Public funds have largely resisted, arguing for less disclosure rather than more.
Until now. The Ohio Bureau of Workers' Compensation, a state-run fund with $15.7 billion in assets, is pushing to lift the curtain almost completely. In a complaint filed with the Franklin County Court of Common Pleas on Jan. 13, Ohio Workers seeks approval to publish sensitive data on the private equity funds it owns, including the names of the companies in each fund, their valuations, and how those valuations were derived.
The mere possibility of such disclosure has the private equity world in an uproar. They fear that the exposure of portfolio-specific data could damage their competitive positions and hurt investment returns. If the Ohio effort succeeds, private equity might decide public investors aren't worth the hassle.
Why does Ohio Workers want to reveal all? Call it scandal management. Between 1998 and 2001, the fund handed $50 million to a money manager to invest in rare coins. "Coingate" erupted in 2005 after a local newspaper reported that up to $13 million of the investment may be unaccounted for. The matter is under investigation. On top of Coingate, one of Ohio Workers' hedge fund holdings made a bad bet on interest rates, costing Ohio Workers $216 million. So the group decided a little sunlight was needed. "We felt it was appropriate to carry the torch as opposed to waiting for someone to force us into something," says Ohio Workers director William Mabe, hired in October to clean up the fund.
Disclosing the data would broaden the interpretation of Ohio's Freedom of Information Act, which was conceived during the 1960s, before private equity funds became the force they are now. In recent years, several states, notably California and Texas, have changed their rules to address the public's desire for increased disclosure while balancing the importance of privacy to investment firms. Several states now allow the release of broad return data, the assets in the funds, and other general information. Ohio Workers already released the names of the specific funds it owns.
But no public fund has yet revealed nitty-gritty details. Doing so, the industry argues, could hurt private equity funds and their investments. Many of their companies are upstarts in niche categories, so keeping a competitive edge is critical, they say. "Putting out their marketing program or what they're doing in the lab jeopardizes the ability of those companies to succeed," says Mark G. Heesen, president of the National Venture Capital Assn., a trade group. Moreover, stamping a value on a company now and publicizing it may make it harder for a fund to justify loftier valuation numbers later on.
Private equity firms have already begun shying away from public entities. The Ohio case could further limit the investment opportunities for public pension funds or shut them out of the asset class entirely. "Why should a fund take money from a limited partner who is telling them up front that they don't understand their business?" says Joseph C. Aragona, general partner at VC firm Austin Ventures.
The fallout from the Ohio case could be huge for public pension funds. Although private equity makes up a small fraction of public money -- just 2%, or $50 billion -- experts say it's an important tool for diversifying and enhancing returns. That's why others are watching the Ohio case so closely. The Pennsylvania Public School Employees' Retirement System sent a letter to Ohio Workers voicing its objections, and the Pennsylvania State Employees' Retirement System is contemplating filing a brief with the Ohio court.
Ohio Workers is considering exiting private equity but hasn't made a decision. "Disclosure is an emerging problem," says Mabe. "More states will have to deal with it, if they haven't already." It's a fight that's just getting started.
By Adrienne Carter