Photograph by Hans Neleman — Getty Images
By Dan Primack
November 18, 2015

Private equity firms take confidentiality very seriously. Unless it gets in their way.

That was the takeaway from a workshop presentation earlier this week by Marte Castanos, senior counsel with the California Public Employees’ Retirement System (CalPERS), a $300 billion public pension fund with nearly $29 billion in private equity assets.

For the uninitiated: CalPERS and other “limited partners” in private equity funds are required to sign confidentiality agreements that restrict them from publicly disclosing certain types of fund-related information. Among covered documents are the actual limited partnership agreements (LPAs), which detail all sorts of fee and profit-sharing structures. The official reason for these blanket restrictions is “trade secret,” with private equity firms claiming that rival firms could gain a competitive advantage – or perhaps level the playing field – by viewing (and then possibly adopting) such structures. Sure it’s silly – plenty of these LPAs have leaked without subsequent harm – but limited partners have held up their end of the confidentiality bargain.

What Castanos said during the workshop, however, was that private equity firms themselves have not shown similar discretion. He claimed that, while negotiating a fund agreement with CalPERS, certain private equity attorneys will agitate for more favorable terms by citing past agreements CalPERS has reached with other private equity funds (some of which are represented by the very same fund formation attorneys). So much for the sanctity of trade secret.

From Castanos:

“What happens with these negotiations are, ‘Hey you agreed to this before.’ So we bring up terms. ‘Hey, you agreed to this last time.’ And we get that not only in regard to, ‘Hey you agreed to it last time in this fund with this general partner.’ But it’s a small industry, the big GPs have overlap in counsel who represents them. They know what we’ve agreed to. So it’s very common that we ask for a term and they throw it back at us and say ‘Well you agreed to this before in this fund or this fund.’ So it’s an uphill battle.”

When asked about this scenario by CalPERS board member J.J. Jelincic, Castanos added:

“In those situations where I’ve been on the phone and someone has said ‘Hey you agreed to this,’ I don’t know what it’s worth but we’ve taken them to task about the confidential nature of that and elevated the issue. But I do think it would be naive of us to think that the GPs don’t have a database of what CalPERs has agreed to . . . It’s one of the dynamics of negotiating these agreements.”

What’s particularly troubling here not only is the double-standard, but how it’s used against all prospective limited partners. Private equity firms keep their simultaneous negotiations private, which lets them tell a group like CalPERS that no one else is asking for a particular term, even if everyone is indeed asking for it. And if CalPERS tries to compare notes with its peers, it could become subject to an anti-trust lawsuit.

“We’re out on an island negotiating on our own,” Castanos explained. “We know there are hundreds of other islands, or dozens at least . . . but we’re unaware of the details of those negotiations and the GPs like to keep it that way.”

Perhaps, as Jelincic would later suggest, it may be time for investors like CalPERS to test the applicability of those anti-trust statutes. Or just treat confidentiality with a similar level of care. If they choose the latter, I look forward to reading through all of those fund documents…

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