The board, representing pension funds for Kalamazoo city and county, voted 5 to 0 not to extend pension fund assets to venture capital investments because the board saw “no advantage to our portfolio assets,” vice chairman of the investment committee Chris Ruppel told the Kalamazoo Gazette. Simply put, the board saw these investments as being too risky.
Even though Ruppel said the decision was based on “a very analytical approach,” other board members expressed concerns about regulation and oversight. “Venture-capital funds are not regulated by the US Securities and Exchange Commission (SEC). It is difficult to get information on these funds,” said chairman John Nelson.
Bill Dundon, finance director for the county, said the decision of the investment committee would go to the Kalamazoo City Commission and Kalamazoo County Board of Commissioners. But he said it is his understanding that the committee has decided the issue for now.
The vote was a blow for Southwest Michigan First, Kalamazoo County’s economic-development agency, which in April announced plans to create a $150 million venture-capital fund to help laid-off Pfizer Inc. scientists launch new companies in the area. To support this idea, city and county officials in May requested that the committee look into the possibility of investing pension funds in the project, and the plan had the enthusiastic backing of Kalamazoo City Manager Pat DiGiovanni.
Barry Broome, chief executive officer of Southwest Michigan First, was pushing for the city and county to each invest about 2% to 3% of their funds’ assets, which would equal about $10 million for the city and between $2.4 million and $3.6 million for the county. However, the investment proposal drew sharp criticism from some current and former employees who said it put pension funds at risk.
Similar concerns have been expressed to venture capital investment proposals floated by Louisville, Kentucky Mayor Jerry Abramson. His plan called for state pension dollars to be invested through two Louisville venture capital firms. The idea is that state investment could generate between $480 million and $720 million, roughly 2% to 3% of the assets controlled by the pension systems, which would be used to help companies start and grow (See Louisville Mayor Wants State Pension Funds in VC Firms ).
However, Stuart Reagan, chief investment officer for the Kentucky Teachers’ Retirement System, did not see venture capital as a good investment right now, and notes that the fund probably will never invest 2% to 3% in the asset class. “It’s a high-risk asset class that has done miserably over the last couple of years,” said Reagan, according to the report (See Bluegrass Pensions Resist VC Push ).
However, more and more, public pension systems’ dependence on private equity investments is increasing at an alarming rate. As of June 2002, the 123 state-sponsored systems had $104 billion in these investments, an increase of 51% in just the last year. A PLANSPONSOR/Fidelity Management Trust Company study conducted in mid-2002 showed 46% of systems are using these alternative investments or plan to add them in 2003 (See The Public’s Vested Interest in Private Equity ).
Further, some public pension funds are beginning to disclose more information on their private-equity holdings, despite earlier contentions that such disclosures might threaten the ability to make future investments. In March, the nation’s largest public pension funds, the California Public Employees’ Retirement System (CalPERS), announced plans to work with other large investors to develop standards for reporting valuations and returns on private-equity investments (See CalPERS Now Champions VC Disclosure ). This Alternative Investment Management Disclosure Plan, include Web site postings of previously unreleased information such as:
- cash in and cash out
- overall rates of return for venture capital funds
- performance by “fund to fund” investment advisers.
CalPERS’ plan comes as part of a broader proposal to develop, in conjunction with the venture industry a disclosure policy for private equity information providing transparency, yet holding consistent with the fund’s fiduciary duty to its members to maximize investment returns. The pension fund is further urging “other industry participants to work together to develop and adopt global standards in private equity reporting and valuation in the next 12 months.”
However, at least one public pension fund is raising questions as to its ability to release such information. The University of Texas Management Co (UTIMCO) has said it is seeking a new opinion from the state’s attorney general as to whether it can release performance data without the approval of individual venture funds. The state’s previous attorney general had ordered the data released.