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Disclosure of private equity fund data

The confidentiality of US private equity fund data is increasingly under threat as publicly listed limited partners are being forced to reveal details of their investments. Malcolm Nicholls of Testa, Hurwitz & Thibeault discusses the implications for US private equity firms and the strategies that some firms are employing to avoid disclosure of sensitive information.

It has become obvious in recent months that performance data and other sensitive information provided by private equity funds to their limited partners may not be safe from public disclosure. That is because many investors in private equity funds are public entities - e.g., public pension plans or endowment funds of public universities - that are subject to open records laws that require these investors to publish or disclose their own investment results and other information upon request. In addition, many private equity investors are private funds of funds, which have as investors public entities that are subject to open records laws. Finally, other private equity investors are publicly traded funds of funds or other publicly traded entities subject to listing requirements that require them to publicly disclose details of their performance and investment portfolios.

Each state and the federal government has its own version of an open records law, and these laws differ from one another in important ways that affect private equity fund managers. Generally, open records laws require that a wide range of information held by public agencies be made available to the public upon request. The scope of these laws often covers the limited partnership organizational documents and the data set forth in periodic reports that public pension plans and endowment funds of public universities receive as limited partners of private equity funds.

Most fund managers are very concerned about continuing disclosure of sensitive partnership information by their limited partners. As a consequence, many fund managers are considering strategies to avoid public disclosure of sensitive private equity fund data by their public investors. Because open records laws vary greatly from state to state, a single strategy may not be effective to prevent disclosure by all of the public investors. Among the strategies that fund managers are considering are the following:

·  Taking a proactive approach and contacting each public investor to determine how disclosure by that investor can be avoided and working with the investor to determine the most successful approach to avoid public disclosure of sensitive data.

·  Keeping the fund's data from becoming a public record. Many state open records laws require disclosure only of information that is in the possession of a public agency at the time a request for information is received. Accordingly, many fund managers are re-evaluating what types of information should be disclosed and the way that information is disseminated.

·  Entering into confidentiality agreements with investors. Many states will not require disclosure by public agencies that are bound by confidentiality agreements with their business partners.

·  Labeling each page of fund information that is disseminated “confidential,” and including a statement of the fund's policy regarding confidentiality and a statement or letter justifying why the confidentiality of the information should be maintained.

·  Amending partnership agreements to add the general partner's ability to facilitate the transfer or repurchase of a limited partner's interest if disclosure by the limited partner could damage the fund.

·  When forming a new private equity fund, or before providing any additional information to limited partners, having the limited partners represent whether they are required, or intend, to disclose to any third party any of the fund's confidential information, and requiring immediate notice of a limited partner's decision to disclose, or receipt of a third party request for, information about the fund.

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