KKR & Co. warned Iowa’s public pension fund against complying with a public-records request for information about fees it paid the buyout firm, saying that doing so risked it being barred from future private-equity investments.
In an Oct. 28 letter to the Iowa Public Employees’ Retirement System, KKR General Counsel David Sorkin said the data was confidential and exempt from disclosure under Iowa’s open-records law. Releasing it could cause “competitive harm” to KKR, the letter said, and could prompt private-equity fund managers to bar entree to future deals and “jeopardize [the pension fund’s] access to attractive investment opportunities.”
Iowa soon after released a document with numerous redactions requested by KKR, in a “Transparency Report” that details certain fees and expenses from a 2006 KKR fund in which Iowa invested $70 million. The pension fund received requests for documents from The Wall Street Journal and others.
A KKR spokeswoman said confidential treatment enhances the firm’s ability to share extensive amounts of information with its investors.
Buyout firms, facing scrutiny from regulators on fees and expenses, are trying to keep details of those matters and many others from becoming public through freedom-of-information-law requests being made by journalists, unions, private citizens and others. They have been advising public pension funds to keep secret details about fees, interactions with regulators and other investment data.
There has been a flurry of open-records requests after the Securities and Exchange Commission this year raised concerns about fee and expense practices at buyout firms. The requests often seek details on fees and SEC regulatory examinations.
Financial firms and other corporations often closely guard what they deem to be secret strategies with competitive implications. In this case, private-equity firms are sometimes threatening to punish investors who don’t heed warnings about keeping documents they deem confidential out of public view.
Public pension funds collectively are the largest investors in private equity, with more than $500 billion committed world-wide, accounting for roughly 28% of the total cash outside investors give these investment firms, according to data provider Preqin.
Government employees, retired teachers, firefighters, police officers and taxpayers all have money at stake in these pension plans, and have an interest in how the plans are run and the fees they incur.
The pension funds, under pressure to seek sizable returns amid funding shortfalls, often want to avoid antagonizing buyout fund managers. Meanwhile, private-equity firms aren’t shy about suggesting that access to their funds, which can garner big returns, is a privilege that can be taken away.
Once public pension funds start releasing detailed information in response to public-records requests, “that’s the moment we’re done,” said Linda Calnan, interim chief investment officer of the Houston Firefighters’ Relief and Retirement Fund. “These are sensitive documents that managers don’t want out there.”
In the Iowa case, the pension fund’s general counsel, Gregg Schochenmaier, said KKR’s confidentiality request was “an appropriate assertion of their rights” under Iowa public-records law.
There are varying federal and state open-records laws designed to allow citizens access to documents, emails, meeting minutes and other records related to how government agencies and employees conduct work.
Buyout firms contend it is crucial to keep much information secret for competitive reasons. Disclosing certain data “could undermine a fund’s ability to invest and generate high returns for its limited partners,” said Steve Judge, chief executive of the Private Equity Growth Capital Council, an industry advocacy group.
Private-equity firms enjoy special protection under some state open-records laws, exempting much of their information from disclosure. Some of the exceptions were enacted a decade ago, after a 2003 incident in which venture-firm Sequoia Capital booted the University of Michigan from its fund after the school provided performance data to a newspaper. A Sequoia spokesman declined to comment.
Other skirmishes have arisen this year in various states. A North Carolina public-employees union this year battled the state treasurer over open-records requests, which sought information about alternative-investment fees as part of a union investigation into alleged pay-to-play activities. Citing a broad “trade secrets” exemption for records designated confidential by state contractors, the treasurer produced some records that were heavily or completely redacted.
“It’s all cloak-and-dagger and very hidden with the fees,” said Anne Marie Bellamy, a 60-year-old retired community-college administrator and union activist in Holden Beach, N.C., who receives state pension benefits. “We have a right to know where our money is. I’m planning on that money.”
A spokesman for North Carolina’s treasurer said it provided many unredacted documents to the union, but was obligated under state law to protect certain information. The treasurer’s office avoids making them public amid concerns that investment firms and other companies would stop doing business with the state, he said.
In June, citing concern about the SEC private-equity scrutiny, the Washington State Investment Board sent a questionnaire to 38 of its private-equity managers, asking about fees and expenses and the results of any SEC examinations.
In response to an open-records request from the Journal, the Washington pension fund asked its private-equity managers whether they were opposed to releasing the records under state law. The fund said it received overwhelming expressions of concern about confidentiality from the firms and needed time to review which records would be redacted.
In Florida, a special exception to the state’s expansive Sunshine Law, enacted in 2006, allows alternative-investment firms to designate documents as proprietary and exempt from disclosure.
The Florida pension fund this year also emailed private-equity managers asking about fees and SEC exam findings. In response to a Sunshine Law request from the Journal, the fund provided some heavily redacted responses. A three-page response from KKR was almost entirely redacted.
A spokesman for the Florida fund said the 2006 law shielding some records from disclosure achieves “an appropriate balance.”