An interesting fight is brewing in Austin over investment policy for public funds in Texas.
Venture capitalists are opposing Greg Abbott, the Texas Attorney General, in regard to his opinion that they must publicly disclose information about their investments on behalf of public institutions.
Austin Ventures, a prominent Texas venture firm, has threatened to end its relationship with two limited partners — the Teacher Retirement System of Texas and University of Texas Management Corp. (Utimco) — if they do not join a lawsuit that is contesting the attorney general’s opinion that would require release of fund-performance data and other information about venture-backed companies.
The dispute stems from requests filed under state open-records laws by several newspapers seeking information about private-equity investments by the teacher-retirement fund and the Texas Growth Fund, which is a state-run investment trust. The funds denied the requests, and asked Attorney General Abbott to back them up. The funds argued that the information was confidential under the terms of their partnership agreements and that releasing the proprietary information could put venture-backed companies and their investors at a competitive disadvantage.
Nevertheless, in a June, 2004 opinion, Mr. Abbott said the funds had failed to show how releasing the information “would bring about specific harm to their marketplace interests.” In a subsequent letter to Utimco and the teachers’ fund, Austin Ventures said that the disclosures could “sabotage under-performing companies” and force start-ups to raise additional capital on unattractive terms. Moreover, Austin Ventures claimed that entrepreneurs would spurn investments from Austin Ventures or any other VC fund that could not maintain the privacy of their confidential information.
Sequoia Capital, one of Silicon Valley’s top venture-capital firms, last year terminated two longstanding investors — the universities of Michigan and California — from its latest fund because it did not want information about the performance of its closely held investments to be disclosed under those states open-records laws. The Texas case potentially has bigger stakes because the information that would be disclosed includes data about the performance of individual portfolio companies and the value that venture backers place on them.
Texas Growth Fund filed the Texas case in state court and requests that the court overturn the attorney general’s opinion. The teachers’ retirement fund joined the suit after receiving the August letter from Austin Ventures. Utimco, which already releases performance data for the fund but not for its underlying investments, wrote to the attorney general objecting to his ruling, but has not decided whether to join the suit.
As of May 31, Utimco had $76 million committed to Austin Ventures, less than 1% of its $16.2 billion portfolio. On the other hand, Austin Ventures has $2.4 billion under management, so the Utimco investment is a larger percentage of that portfolio, but still not a substantial portion of it. TRS currently has committed $55.3 million of its $84.4 billion endowment to Austin Ventures. Consequently, we are talking about very small parts of the public funds’ portfolios here.
Quare: Should trustees and investment management of Texas public and quasi-public funds be restricted from diversifying the investment portfolio of such funds by legislation that effectively denies such funds from investing in potentially profitable venture capital funds that limit information about their investments? If so, why should public funds be restricted from investing an appropriate amount of their portfolios in potentially the most profitable investments?