The Private Equity Analyst WEEKLY Page 6 of 7 NOVEMBER 12,
MARKET INTELLIGENCE
NVCA Advocates More Confidentiality on Returns By Sree Vidya Bhaktavatsalam
Could it be a coincidence that GPs are getting touchier on the
issue of confidentiality of fund performance data at a time when
private equity returns are plummeting?
The National Venture Capital Association recently distributed
a list of suggestions for GPs to reduce unwanted
disclosure of information included in reports to their LPs,
particularly public pension funds, presumably to spare GPs the
shock of seeing their fund returns posted on a Web site or in a
trade press article.
Many state, municipal and local pension funds have fair
disclosure regulations, which, in the interest of transparency,
may require that the information be made available to the
public. NVCA’s suggestions include entering into confidentiality
agreements with LPs and tailoring the data distributed to
minimize the “harmful effects of subsequent public disclosure.”
Advocates for keeping performance data confidential
argue that the private equity industry relies on imperfect
information about private companies, which can be too
sensitive to reveal to the public. Also, they say that in the
absence of any standardized method of reporting private equity
returns, performance data presented in the form of IRRs can be
inaccurate and misleading.
President Mark Hessen of the NVCA says his concern is
that individuals (reporters, for example, or retirees whose public
pension program is used to invest in private equity funds) may
not be well-versed in the intricacies of performance data and
thus will get a distorted view of overall fund returns by looking
at quarterly reported returns.
‘A quarterly perspective is not representative of the entire
fund,’ he says. “We need to educate the public before we can
throw this information out there.”
Still, some like Michael Smith, director of research at
Atlanta-based consulting firm Hewitt Investment Group, believe
that transparency is the only way for prospective
Sources of private equity fund performance data
Venture Economics, Newark, N.J.: A division of
Thomson Financial. Provides industry wide private
equity performance benchmarks. Reach the firm at 973-
622-3100.
Cambridge Associates, Boston: Provides private
equity performance benchmarks and consulting services.
Reach the firm at 617-457-7500.
InsiderVC.com. Austin, Texas: Provides performance
data on individual venture capital firms. Its Web
site is at http://www.insidervc.com.
investors to separate “the wheat from the chaff.
“This is a market that two years ago did not need new
quality institutional investors,” he says. “Clearly that is different
now-if (VCs) want to broaden their appeal, the way to do it is by
making it more transparent.”
NVCA’s suggestions come at a time when GPs are still
smarting from California Public Employees’ Retirement
System’s decision earlier this year to post fund performance
data on its website. Calpers posted the IRRs of the 163
partnerships it had invested in since 1990, and had downgraded
some firms as “not performing up to expectations.” (See Private
Equity Analyst Weekly, June 4, page 5.) A few months later,
Calpers yanked the returns data from its Web site, after receiving
complaints from its GPs.
So, how can prospective investors gain access to the
performance data of venture capital and private equity firms?
Some public pension funds do make their quarterly performance
reports available to the public as a matter of course. Others,
like Florida State Board of Administration, make information
available, if the public requests it. And then there are quarterly
benchmark numbers for the whole industry released by Venture
Economics and Cambridge Associates. (See table below.)
One source of fund performance data is the Web site
InsiderVC.com, whose founder, Stephen Lisson, has received
both brickbats and bouquets from venture capitalists for his
analysis of performance data and his provocative commentary.
His Web site provides performance data of hundreds of venture
capital and private equity funds including those managed by
New Enterprise Associates and Matrix Partners.
In an interview, Mr. Lisson declined to reveal his sources
of information. “The reason people share information with us is
that we are very discreet, and we are very careful about who
sees our information.” Indeed, Mr. Lisson carefully screens
applicants before allowing them to subscribe to the performance
data contained in his Web site.
Mr. Lisson stresses that his data is not intended for the general
public. “My data is for insiders to improve their own game. VCs get to
benchmark themselves against their peers-it’s a confidence level
thing,” Mr. Lisson says. Mr. Lisson acknowledges that the VC
community could benefit from a healthy dose of transparency and
humility. “Sunlight is the best disinfectant,” he says. But he questions
the value of making public IRRs and interim valuations, which by
nature are based on subjective evaluations. “There should be less
focus on returns and interim valuations, and more focus on building
world class companies.”
Copyright 2014 Asset Alternatives, Wellesley, Mass.