New California Law Requires Additional Public Disclosure by Private Funds

by BakerHostetler
Contact

On Sept. 14, 2016, the State of California enacted new legislation that requires additional public disclosure by the funds of any California public pension or retirement system, including the University of California (Public Investment Funds), with respect to their investments in private equity funds, venture funds, hedge funds or absolute return funds (Alternative Investment Vehicles). The law, AB-2833 (the Act), is designed to “increase the transparency of fees paid by public investment funds to alternative investment vehicles” since “public investment funds pay significant fees to alternative investment vehicles and do not have sufficient information regarding the character and amounts of those fees.” Because the Act affects the portfolios of such large pensions as CalPERS and CalSTRS, among others, the implications of the Act, including any possible backlash by fund managers and sponsors, may be far-reaching.

More specifically, the Act adds a new Section to 7514.76 of the California Government Code, which obligates every Public Investment Fund to disclose, at least annually, the following information with respect to each Alternative Investment Vehicle in which it invests:

1. The fees and expenses that the Public Investment Fund pays directly to the Alternative Investment Vehicle, the fund manager or any “related parties,” which are defined to include all of the following:

(a) Any “related person,” that is, any current or former employee, manager or partner of any related entity that is involved in the investment activities or ascertaining and valuation functions of the relevant entity or any of their respective family members.

(b) Any “operational person,” that is, any operational partner, senior advisor, or other consultant or employee whose primary activity for a relevant entity is to provide operational or back-office support to any portfolio company of any Alternative Investment Vehicle, account or fund managed by a related person.

(c) Any entity more than 10 percent of which is held, directly or indirectly, by a related person or operational person, regardless of whether the related person or operational person participates in the carried interest received by the general partner or special limited partner.

(d)  Any consulting, legal or other service provider regularly engaged by portfolio companies of an Alternative Investment Vehicle, account or fund managed by a related person and that also provides advice or services to any related person or relevant entity.

2. The Public Investment Fund’s pro rata share of fees and expenses not included in Paragraph 1 that are paid from the Alternative Investment Vehicle to the fund manager or related parties. However, if the Public Investment Fund independently calculates this information, then the Alternative Investment Vehicle will not be required to provide it.

3. The Public Investment Fund’s pro rata share of carried interest distributed to the fund manager or related parties.

4. The Public Investment Fund’s pro rata share of aggregate fees and expenses paid by all portfolio companies held within the Alternative Investment Vehicle to the fund manager or related parties.

5. Any additional information described in Section 6254.26(b) of the California Government Code, which includes:

(a) The name, address and vintage year of each Alternative Investment Vehicle.

(b) The dollar amounts of the commitment and the cash contributions made to each Alternative Investment Vehicle.

(c) The dollar amount, on a fiscal year-end basis, of cash distributions received by the Public Investment Fund from each Alternative Investment Vehicle.

(d) The net internal rate of return and the investment multiple of each Alternative Investment Vehicle since inception.

(e) The dollar amounts of the total management fees and costs paid on an annual fiscal year-end basis by the Public Investment fund to each Alternative Investment Vehicle.

(f) The dollar amount of cash profit received by each Alternative Investment Vehicle on a fiscal year-end basis.

Each Public Investment Fund must disclose all of the above information at least once annually in a report presented at a meeting open to the public. Such report must also include the gross and net rate of return, since inception, of each Alternative Investment Vehicle in which the Public Investment Fund participates.

The new legislation applies to all new contracts that a Public Investment Fund enters into on or after Jan. 1, 2017, and to all existing contracts pursuant to which a Public Investment Fund makes a new capital commitment on or after Jan. 1, 2017. Furthermore, each Public Investment Fund is required to take “all reasonable efforts” to comply with the reporting requirements of the Act for all other existing contracts with Alternative Investment Vehicles as to which no new capital is to be committed. The Act, however, does not explain what the term “all reasonable efforts” encompasses. Query whether a written request would be sufficient, or whether a Public Investment Fund must take even more steps.

The Act’s goal of increased transparency is consistent with trends in the private fund industry, including the Private Equity Principles of the Institutional Limited Partners Association (ILPA). Among other things, ILPA has advocated for more disclosure to investors by fund GPs, especially with respect to management and other fees. However, the Act would take the additional step of making such disclosure publicly available, which fund managers, who often put a premium on confidentiality, may try to resist by avoiding investments from California’s Public Investment Funds.

The consequences of the Act must therefore be closely monitored. In particular, it will be instructive to see whether other states follow California’s lead. It will also be important for Alternative Investment Vehicles and Public Investment Funds to determine the extent of “all reasonable efforts” and whether fund managers comply when Public Investment Funds, pursuant to the Act, seek disclosure when they are no longer making additional capital commitments to their existing investments.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© BakerHostetler | Attorney Advertising

Written by:

BakerHostetler
Contact
more
less

BakerHostetler on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!