After lawsuit, UC must disclose venture capital investments

The University of California must publicly disclose by mid-March the performance of its individual funds invested in top-tier venture capital investment firms, the California Superior Court ruled earlier this month. The ruling has caused some UC officials to worry about losing future investment opportunities.

The lawsuit, which draws on a Calif. statute that requires public institutions to release their information to the public, was filed by the international news organization, Reuters, against the UC Board of Regents. In March 2011, Mark Boslet, a Reuters senior editor who writes about private investments, requested specific information about the performance of individual funds invested in two venture capital investment firms, Kleiner Perkins and Sequoia Capital, according to court documents.

A venture capital investment firm is a company that invests in young, high-risk businesses to potentially receive higher returns on their investments, said Mark Garmaise, a finance professor at the UCLA Anderson School of Management.

Boslet filed a lawsuit against the UC Regents after the UC failed to produce the requested information about its individual investments in Kleiner Perkins and Sequoia Capital.

Public institutions are legally required to disclose the performance of their investments under an 2005 amendment to the California Public Records Act. Institutions are exempt, however, from disclosing information if they do not have it or do not use it to make investment decisions.

Reuters claimed the UC called into question a portion of the California Public Records Act by not disclosing information on the individual funds’ performances, though UC officials said the University contended that information about its investments in Kleiner Perkins and Sequoia Capital is exempted under the 2005 amendment. The individual funds’ performances for all of the UC’s other venture capital investments have been publicly disclosed, according to court documents.

The court ruled the UC has not violated the California Public Records Act, but stated that the UC will need to make an “objectively reasonable effort to obtain” the information, according to court documents.

The UC Treasurer, who manages UC investments, does not have or use the requested information about investment decisions, said Margaret Wu, managing counselor for the Litigation Group of the UC Office of General Counsel.

Dianne Klein, a UC spokeswoman, said the UC has invested portions of its $10.6 billion endowment fund and pension funds for UC faculty and staff with the two firms mentioned in the lawsuit. The UC has a portion of its investments in the two firms mentioned in the lawsuit, Kleiner Perkins Caufield and Byers and Sequoia Capital, because they have high return rates on investments and have been fairly successful in the past, Klein said.

Only a small percentage of the UC Treasurer’s total investment portfolio, which includes the $10.6 billion endowment fund, is allocated toward venture capital funding, said Dianne Klein, a UC spokeswoman. The UC invests the rest of its portfolio in other areas, like regular commodities and government bonds, she added.

The endowment funds invested with Kleiner Perkins and Sequoia Capital come from endowments at all UC campuses.

A portion of the UCLA endowment, used to support the purposes established by private donors, is managed by the UC Treasurer, said UC spokesman Phil Hampton.

The UCLA Investment Company, which manages a portion the UCLA endowment of about $2 billion, is currently investigating any impact the court case could have on the university’s endowment, Hampton said in the statement.

UC officials said they are concerned the court case will have financial impacts for the University.

“(UC Officials) believe this ruling will negatively affect the way public agencies do business with private entities,” Wu said. In a time of decreased state and federal support, endowment managers at universities are trying to preserve capital, so they want investments with a good probability of decent return, said Dana Warren, professor of law at Loyola University Law School.

When the 2005 amendment to the California Public Records Act was implemented, the UC lost $1 billion in new investment opportunities. UC officials are concered with losing further investment opportunities from the recent court decision, Klein said.

Daniel Mitchell, a professor emeritus of the UCLA Anderson School of Management and Luskin School of Public Affairs, said in general, venture capital investment firms – especially top-tier – do not immediately release information on individual rates of return, because they do not want their competitors to know their funds’ performances.

Karl Olson, outside legal counsel for Reuters, said Reuters is pleased with the outcome of the California Superior Court’s decision.

“The public has an overwhelming right to know how public institutions invest their money,” Olson said.

The UC regents have until March 11 to appeal the court decision, or the court’s stipulations will immediately take effect. The UC counsel plans to appeal the court decision, Wu said.