Releasing Private Equity Limited Partnership Agreements from Carlyle and Grosvenor

As established readers know, we have been putting private equity limited partnership agreements online in the interest of increasing transparency and promoting investigative work in this secretive industry. The latest contracts, Carlyle Partners V, L.P. and Grosvenor Institutional Partners, L.P., obtained from authorized parties, are available here. These additions bring our document trove, which includes limited partnership agreements from such prominent industry players as KKR, Blackstone, TPG, and Cerberus, to 25 agreements.

Readers new to this site can view a recap of of our major posts on private equity from 2012 to the end of May 2014 here. Or you can click on the Category “Private equity” in the right column to see all posts in reverse chronological order.

As we stated when we published the first set of private equity limited partnership agreements that had been made public by the Pennsylvania Treasurer’s office but had gone unnoticed:

It is hard to overstate the significance of Pennsylvania’s release of these private equity limited partnership agreements. This development will change the industry forever. Even a superficial reading of these documents shows that investors and policy-makers were naive to treat private equity general partners as deserving of the blind trust they had placed in them.

That post discusses at length that the private equity industry’s justification for its zealous efforts to shroud its activities in secrecy — that its agreements contained trade secrets — was bogus. Other experienced commentators, such as seasoned industry reporter Dan Primack at Fortune, have reached the same conclusion. And as we discussed then, the motivations for the private equity industry to keep these agreements under wraps is to prevent portfolio company employees from making whistleblower or qui tam filings in instances of private equity firm scamming, to avoid the disclosure of complex tax dodges, and to hide deceptive language that enables the general partners to extract more in the way of fees from portfolio companies than the limited partners understood that they were taking. As we concluded:

For decades, the NSA kept its domestic spying activities under wraps, claiming that it served as a wise and responsible steward of the powers with which it had been entrusted. Similarly, the private equity industry has insisted for decades that none of the usual SEC and FOIA transparency requirements should apply to its activities, but that the general partners should be trusted to comply with the law and treat investors fairly.

Snowden’s documents revealed that much of the NSA’s domestic spying is arguably illegal, and that a primary objective of the secrecy surrounding it was to shield the NSA from accountability and oversight, since that would curb the scope of the agency’s actions. The private equity industry now finds itself in much the same situation, albeit in this case, there’s no Snowden-like insider who chose to break institutional rules and give confidential information to journalists. Here, a public pension fund had simply made them public and it took a surprisingly long amount of time for anyone to notice.

Nevertheless the uncomfortable analogy to the NSA’s fetish with secrecy remains. Here the exposure of key documents reveals the private equity industry’s claims that the general partners obey the law are false. Instead, critical elements of their scams and violations of public interest depend on their being hidden from view.

The document release also reveals what dupes the investors have been. The SEC has already reached that conclusion, stating in a recent speech that investors have done a poor job of negotiating agreements so that they protect their interests and have done little if any monitoring once they’ve committed to a particular fund….

But rather than live up to their fiduciary duties, pension funds that have invested in private equity funds haven’t merely sat pat as they were fleeced; even worse, they’ve been staunch defenders of the private equity industry’s special pleadings.

The private equity industry’s obsession was never about competing effectively. It was a self-serving ploy to shield the documents from scrutiny, since third parties might ferret out how private equity firms increase their already substantial profits at the expense of compliant, clueless investors.