Private Equity Says “Nothing to See Here” on Secret Document Release, So Why Not See Them All?

I had promised readers another post in what will be a series explaining what isn’t and is in the twelve heretofore super-secret private equity limited partnership agreements that had been made public by the Pennsylvania Treasury and we published early this week. However, it seems more pressing to provide an update on various related developments yesterday.

First, the Pennsylvania Treasury took the documents down on Thursday, so that our websites (here and here) are now the best way to obtain them. Note that does not necessarily mean the the state Treasury was pressured to take them down. Media outlets were contacting them on Tuesday, so the agency knew of the issue then. It’s reasonable to assume that given that they had signed confidentiality agreements for each of these documents that they felt they needed to take them down to minimize exposure.

Second, Chris Witowsky of the widely-read Reuters publication peHUB released a new story, What the LPA leak shows about PE today. Key points from his account:

Some general partners have taken a fairly relaxed view of the recent leak of their limited partner agreements—which raises the point that what has been under lock and key for so long in this industry actually doesn’t need to be….

I contacted most of the firms whose LPAs were made public: Kohlberg Kravis Roberts & Co, Cinven, Windjammer Capital Investors, Platinum Equity, Milestone Partners, Incline Equity Partners, Palladium Equity Partners, Silverpeak Legacy Limited Partners, Baring Private Equity Asia and TPG Capital. I managed to talk to a few people on condition of anonymity.

The sense I got was that many of the firms didn’t care very much that the information was out there. The information in the documents was not shocking stuff—general market terms like fees and expenses, key man events, steps in dissolving the partnership, tax implications. One source commented there is nothing surprising in the documents and anyway, private equity isn’t really “private” any more.

GPs have long argued that revealing these contracts to the public would risk revealing trade secrets to competitors. I’m no lawyer, but a quick scan of two of the documents didn’t reveal much that would likely damage a brand just by the mere fact of them being accessible to the public.

Transparency is vital, especially in the public realm. When public institutions enter contracts with vendors, the documents should be open for scrutiny by all constituents.

One industry insider e-mailed me, bemused by the hypocrisy:

It’s just amazing how the GP commentary has turned on a dime, from “These are our precious competitive secrets,” to “Nothing to see here.” I presume that the latter posture reflects a recognition that you have figured out various of the ugly tricks buried in the documents and that reacting like exposure is a big deal only would add credence to your claims.

Let us give readers some data points on how insistent the private equity industry has been heretofore of the paramount importance of keeping these limited partnership agreements under lock and key. As we’ve mentioned, private equity firms have succeeded in getting either legislation passed, or had attorney general opinions issued, that exempt private equity limited partnership agreements, in order to prevent their disclosure under state FOIA laws. That, sports fans, is a non-trivial effort.

A 2008 case in New Jersey, Communication Workers of America v. Blackstone, demonstrates the lengths to which the private equity industry would go when there was a threat that these contracts might be exposed to the public.

Three plaintiffs, Communication Workers of America, AFL-CIO and the New Jersey Education Association sought disclosure of five limited partnership agreements and four side letters from four private equity fund managers, Blackstone, Oak Hill, Quadrangle, and Warburg Pincus, under New Jersey’s Freedom of Information Act laws.

The lawsuit notes that the side letters required that only three employees of New Jersey Divsion of Investment be allowed to have access to the full text of the limited partnership agreements. As we’ve stressed, one of the industry’s claims heretofore has been that these documents are so competitively sensitive that they needed to be treated as trade secrets in their entirety. This is how little the hoi polloi were allowed to see:

…these confidentiality terms allow the SIC [State Investment Council], now a thirteen-member body that includes two union representatives, to obtain “a summary of the material terms of the State’s investment in each fund, including the name and type of the fund, the size and geographic focus of the fund, a general description of the fund’s investment strategy, the term of the fund and the investment period, the amount of the State’s commitment, and the management fee paid to the fund.”

In other words, pretty much bupkis in the way of useful information.

New Jersey’s initial response to the request was to claim that it would take staff 500 hours to review 36,000 pages to respond to the FOIA, and they requested a special service fee of $15,803.78 to produce the documents. As you can see from the releases, even when the subscription agreements were wrapped into the records, the limited partnership agreements only run to over 200 pages. Not that the plaintiffs knew that specifically, but it was clearly ridiculous that nine important, clearly identified documents, four of which were sure to be no more than 20 pages each, would necessitate digging through 36,000 pages of records. So the unions sued.

Shortly after the the State filed its response, the private equity firms filed a motion to intervene. Look at the prophylactic procedures the court had to engineer to contend with the trade secret claims:

On June 18, 2007, the court entered a consent order for answers each defendant intervenor provided to interrogatories that were designated as confidential. The protective order: (1) permitted plaintiffs to utilize the answers in any briefs and at oral argument; (2) prohibited anyone from accessing the answers other than plaintiffs’ counsel and associated attorneys, employees of plaintiffs’ counsel of record and other designated non-party experts; (3) prohibited any private equity firms from accessing the answers of another private equity firm without approval from the court; (4) ordered the private equity firms to justify their designations of confidentiality in any answer; (5) required plaintiffs to file under seal any briefs using answers deemed confidential and to notify defendants and the court, one day in advance and on the day of oral argument, respectively, whether any answers designated confidential would be used at oral argument… the court has, in camera, reviewed the documents. On this record and, given the summary and expedited nature of these proceedings, the court is satisfied the record contains sufficient facts and information, applying the plain meaning of the terms to the appropriate legal standards, to decide the case without the assistance of a third-party professional.

In its analysis, the court stated that merely keeping information confidential did not mean it was protected under the state’s FOIA. It needed to be both proprietary and commercial or financial. The ruling is quite lengthy because the judge summarized the justification each fund gave to justify the supposed trade secret status. Here is Blackstone’s:

With regard to the partnership and side letter agreements between the State and defendant intervenor Blackstone, Kenneth C. Whitney, Blackstone’s Senior Managing Director, asserts the proprietary nature of Blackstone’s investment agreements:

(1) The provisions of the Investment Agreements embody approximately 18 years of experience by Blackstone in the business of private equity investment.

(2) [Blackstone] has rigorously policed the confidentiality of terms governing the investment partnerships it has sponsored.

(3) Blackstone has spent significant time and cost developing and implementing the terms of [the] Investment Agreements․ This effort has consisted of many years of diligent work by the general partner and the principals as well as numerous legal and tax advisors and consultants.

(4) Declining to protect the Investment Agreements from disclosure would abrogate the strict confidentiality Blackstone has carefully established an enforced concerning the terms of the Investment Agreements.

(5) The Investment Agreements are not publicly available, and are delivered in confidence to Common Pension Fund E as a limited partner.

(6) The information contained in the Investment Agreements is provided to Blackstone employees and agents only on a need to know basis and to those persons whose function within the organization requires the knowledge of that specific information in the course of their business.

(7) The side letter agreements are not generally available to all limited partners of the funds. Only those limited partners that are given “most favored nation” status are provided with all side letter agreements.

(8) The Investment Agreements contain express confidentiality provisions obligating each limited partner to maintain the confidentiality of the terms of the Agreements and non-public information regarding the general partner and the partnership, “except as otherwise required by law.”

(9) While the partnerships’ Certificates of Limited Partnership are publicly filed with the Secretary of State in Delaware, the investment agreements themselves are not publicly filed.

(10) In circumstances where certain counter-parties of the funds have a legitimate business purpose to review the Investment Agreements (e.g., creditors), in each such instance the counter-party is first required to agree to keep the Investment Agreements confidential.

In his certification, Whitney also includes the trade, investing and commercial and financial matters in the agreements:

(1) Disclosure of the ․ Investment Agreements would enable a competitor of Blackstone to ascertain, among other things, (i) the structure and size of the Funds, (ii) its investment criteria and strategy, (iii) investment limitations, (iv) coinvestment rights, (v) limited partner rights/obligations to opt-out of proposed investments, (vi) general partner and investment adviser compensation and other internal governance matters, and other key terms.

(2) Many of Blackstone’s independently developed structures for dealing with the complexities of modern private equity investing are embedded in its private equity partnership agreements.

Taken as a whole, these assertions establish that the partnership and side letter agreements with Blackstone are the proprietary commercial or financial information of Blackstone.

The wee problem, as the general partners have ‘fessed up now that everyone can see these documents, is that all of these allegedly really special features don’t confer any competitive advantage. Just like other complex financial agreements that have been developed and perfected over time, but are public, like underwriting agreements or pooling and servicing agreements, “a lot of work” and “complex” are not necessarily tantamount to “special sauce that if disclosed would give our competitor a big leg up.” But the judge was overwhelmed by experts and in no position to take issue with the private equity industry’s assertions.

So now that the private equity firms now treat the disclosure of these formerly super-secret contracts with a collective shrug, we might as well take their new posture seriously.

I hope readers will join me in pushing for the passage in every state of legislation to authorize disclosure of private equity limited partnership agreements and side letters, with the proviso that the legislation does not become effective until it is passed in states that collectively represent at least 25% of all public pension fund commitments to private equity as measured by an authoritative source. After all, the industry hasn’t deigned to respond to the documents’ release, so clearly their is no issue of competitive harm or other justification for continued secrecy. But to make sure the badly captured public pension funds themselves don’t oppose this legislation, it also needs to neutralize the threat used by private equity to intimidate state agencies into siding with them against disclosure: that the general partners will refuse to invite the public pension funds into future deals. If enough industry dollars is at stake, the private equity industry’s past position will become politically and practically untenable.

So let’s see if private equity lives up to its new posture of indifference, or reverts to its former stance when journalists like those at Reuters who’ve been after limited partnership agreements for years come knocking at state pension fund doors asking for disclosure. No doubt, they’ll resume trying to snow judges with their patently false “trade secret” palaver.

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