Earlier this month, the Alameda County Superior Court decided that the University of California must make the performance of its venture capital investments a matter of public record – a more than reasonable request for a public institution like the UC.
The UC Board of Regents has until March 11 to appeal the decision, and the regents have made it clear that they plan to do just that amid concerns that public disclosure will limit the University’s investment opportunities.
This course of action is misguided. In this situation, the UC must embrace its identity as a public institution and cease acting as though it is a private business firm.
Reuters America, the plaintiff in the aforementioned case, called for the UC to release the information on its venture investments under the Public Records Act of California – a statute that the UC itself sponsored.
According to the complaint, Reuters argues for the principle that “there is a strong public interest in knowing how the government spends its money,” and that the UC’s failure to disclose the information conflicts with the Public Records Act.
On what grounds, then, does the UC have to appeal such a decision? The Public Records Act includes a caveat that public institutions are exempt from disclosing information if they do not have it.
Unsurprisingly, then, the UC maintains that it does not have access to individualized performance data from its venture capital investments with the firms Kleiner Perkins Caufield & Byers and Sequoia Capital. Essentially, the UC claims that it only receives aggregate returns data from these firms in which it invests.
It’s clear that the situation is less about the UC not having the data, and more about the UC not wanting the data.
The Superior Court judge, Evelio Grillo, agreed. Grillo found that the University failed to show that it does not have “constructive possession” of the data in question; that is, the UC failed to prove that it couldn’t get the information if it wanted to.
Karl Olson, outside counsel for the plaintiff in the case, said that the evidence shows the UC does in fact have returns information for all but the aforementioned two of the venture capital funds it invests in, and is willfully ignorant of the information from those firms.
“The Regents agreed to get ‘aggregate information’ just so it would make those funds look better,” Olson said. Aggregate investment data wouldn’t show individual returns, minimizing the perceived effect of negative investment data in any specific investment.
From a business standpoint, it’s understandable that the UC wouldn’t want to disclose this information.
Margaret Wu, managing counselor of the Litigation Group of the UC Office of General Counsel, told the Daily Bruin last week that University officials are concerned that this ruling “will negatively affect the way public agencies do business with private entities.”
In some respects, this concern is warranted. Venture capital firms often withhold information on individual fund returns for legitimate reasons, including keeping their information private from competitors and attempting to maintain a strong reputation.
In this vein, venture capital firms might be reluctant to do business with organizations that may be forced to publicly disclose data about their investments, which could impact the UC’s ability to invest with these firms.
But the UC’s “sky-will-fall” attitude toward how public disclosure will affect its ability to invest may not hold much water. Olson said that 10 years ago, the UC was required to disclose information about venture capital investments, including those with Sequoia Capital. Sequoia Capital then requested that the UC sell its holdings in Sequoia funds. However, the UC currently has holdings with Sequoia Capital, indicating that the requirements for information disclosure did not cause a permanent breach between the UC and Sequoia Capital.
Only a small percentage of the UC’s investment portfolio has been put toward holdings in venture capital, but any portion of taxpayer money used for such risky undertakings should be subject to public disclosure.
Regardless of whether the disclosure mandate will hurt the UC’s future ability to invest in certain types of funds, the University needs to accept its identity as a public institution subject to releasing information about its investments to the public, and abandon the mantle of a corporation trying to protect its investments from the public eye.
The UC, then, is in prime position to take a clear step toward defining its role. It can either perpetuate its perceived standing as a commercial entity and continue fighting for secrecy in its investments, or it can find a way to produce revenue that doesn’t require Wall Street-level secrecy.