Board of UT fund cites public doubts

By: R.G. RATCLIFFE
Houston Chronicle Austin Bureau
September 19, 2002, Thursday

DALLAS - Higher education trust fund trustees cited the public mistrust of business Wednesday as they voted to publicly disclose the performance results of the individual managers of the Permanent University Fund's high-risk, $1.7 billion portfolio of private equity investments.

University of Texas Regent Woody Hunt said disclosure of the performance results for the secretive private equity managers is necessary "if we want to be a leader in the post-Enron world."

However, the University of Texas Investment Management Co. Board of Directors noted that while it was approving release of the information, the individual investment managers could fight disclosure under provisions of the state's open records law.

The vote to release the information came three days after the Houston Chronicle reported that UTIMCO was hiding the individual managers' investment results at a time when the entire private equity portfolio lost 15.96 percent of its value.

Private equity funds include venture capital and buyout funds that invest directly in businesses. Investors in these funds bet they will make more money than they could in the stock market. One fund that doubles or triples the investment can make up for another fund that is a loser, the thinking goes.

University of Texas regents promised to make the information public in 1999 after the Chronicle reported that almost one-third of the Permanent University Fund investments in private equities had gone to managers with personal or political connections.

UTIMCO made the records public for two years, but then quietly closed the records again last October. The Chronicle discovered the change when following up on its original report.

UTIMCO President Bob Boldt told the board that secrecy is the standard in the private equity business. Boldt said that if the investment returns are released, there are some highly successful funds that likely will not accept UTIMCO investments in the future.

"My best investment advice to you is, if we went to full disclosure, there may be a price to be paid in forgone returns," Boldt said.

But University of Texas System Chancellor Mark Yudof said he believes the industry's attitude will change over the next year as the public demands more accountability for the performance of investment managers at other public retirement and trust funds across the country.

"There is a sea change of attitude," Yudof said. "I don't think the public is going to tolerate what they perceive as a lack of accountability."

Hunt said the information to be released will include the names of the people who run the fund, its financial goals, how much money is invested in private equity funds, how much has been returned, what the remaining value of the fund is and its rate of return.

Several board members noted that the California Public Employees Retirement System, known as Calpers, tried to release similar information last year but stopped after complaints from investment managers. Calpers is the nation's largest public investment fund.

Calpers spokesman Brad Pacheco told the Chronicle that the information was withdrawn because investment managers complained it was unfair to report a 20 percent positive return for an established fund while a new investment fund operates with an initial negative return.

Pacheco said Calpers is working with the Institutional Limited Partners Association to develop an industry standard for rating the success and failure of private equity investments. Private equity investments are usually set up as limited partnerships.

UTIMCO is a government corporation that manages investments for the University of Texas and Texas A&M University.

UTIMCO director Susan Byrne said she is expected to help the Permanent University Fund earn the highest returns possible, and she worries that public disclosure of private equity performance results might make that difficult. But she said she recognizes the need to make certain the public has faith in the fund's operation.

"This will be very difficult for staff. However, 15 years ago we didn't have Worldcom and Enron and Tyco and all this shocking stuff," said Byrne, a professional financier.

John McStay, another financial professional who serves on the UTIMCO board, said the board followed industry standards in hiding the results.

"It's not like we had a monster under the table. Some (investments) are in the ditch; some are not. It's a game of percentages," he said.

Vinson & Elkins lawyer Jerry Turner told the board that some of the investment managers may still try to block release of the information. He said the managers may ask Texas Attorney General John Cornyn to exempt them from disclosure under a provision of the Public Information Act that prohibits the release of records that would create a competitive disadvantage for a company doing business with the state.

Boldt said he did not know how long it will take to release the records. He said the UTIMCO staff will have to contact each of the 74 general partners who run the investment funds. He said those general partners will have to contact other limited partners before releasing the information.

Boldt said his staff also will have to work with the funds to determine fair ways to release the information.

"The general partners don't want to read in the paper that the partnership is down 3 percent when they know the partnership is up 40 percent if you valued the company at a reasonable price," Boldt said.