Venture Fund Disclosure
An article in today's Wall Street Journal (sorry, paid subscription required) brings to mind the simmering issue of venture fund disclosure. Venture capitalists have always had the freedom to operate in nearly total secrecy, and have sometimes provided their investors with mind-boggling returns (though nobody knows what VCs return overall, thanks to said secrecy).
The past few years, there has been an effort by some to pry the lid off the VC community, largely through open records laws which cover public institutions (university endowments, pension funds, etc.) which invest in VC funds. This basically pits the VC's desire to invest in secret against the public's right to know how public investments are managed.
For those not familiar with how the venture world works, it is a very different beast than a mutual fund or other common investment vehicles. Venture funds are typically organized as partnerships between the fund managers (often called "general partners" because they make all the investment decisions) and the investors (the "limited partners" who provide only money, not expertise, to the fund). Each limited partner commits a certain amount of money to the fund, and the general partners invest that money for the limiteds.
Venture investments are inherently illiquid (you can't sell them) and long-term (you can't sell them for a long time). So, in exchange for their money, the limiteds receive a proportional stake in each of the private companies in the fund. When a portfolio company is sold or goes public, that's called a "liquidity event" because the stock in that company is now liquid and can be sold. Of course, the more common outcome is that the portfolio companies go out of business, in which case the stock becomes worthless. But, when there are liquidity events, the shares in the newly public company (or the proceeds from the sale of the company) are distributed back to the limited partners, after the general partners take their fee.
So, the limiteds put money in, and over the next decade or so receive stock in newly public companies or proceeds from the sale of investments. The timing and size of these distributions is impossible to predict in advance. The general partners put in time and expertise (and sometimes money), and receive management and performance fees.
There are two major reasons why the general partners don't want information about their funds disclosed.
The first is because it is very hard to invest in small, privately-held startups when you have to disclose your holdings. The best investments are very competitive (for all but the top VC funds), and many startups are extremely secretive. Probably more secretive than they have to be, but that's a different story.
But the second reason is because VCs currently operate in a comfortable vacuum of information about performance and fees. General partners typically charge management fees of 1% to 2% of the value of the fund per year, plus 20% to 30% of any profits. A smallish $250 million fund will generate up to $5 million a year for the general partners even if they do nothing, and if they double it over ten years (a very modest return by VC standards), an average of another $5 million or so per year. A $250 million fund might have four general partners plus a few staffers, so each of the general partners get to take home a couple million a year for mediocre performance, and a million a year for no performance at all. Were it not for the fact that VC funds can sometimes be absurdly profitable, few investors would tolerate this fee structure.
In addition, it can be very difficult to figure out exactly how well a VC fund is performing. Even if comprehensive data existed (which it doesn't, since too many funds won't release data even to a researcher), venture investments take so long to mature that a meaningful performance measurement isn't really possible until five or more years after the fund starts.
So, you can invest in a VC fund, pay the general partners millions of dollars a year, and after three years you don't even really know if they're performing well or not. Not that you could withdraw your money if your were unhappy, since VC investments are so illiquid.
This is a fine arrangement between consenting parties, but when public money is involved...well, it is no wonder that VCs don't want politicians and activists to have performance and fee data.
As an aside....when discussing VC returns, people pay a lot of attention to the outsized gains posted by a few funds. It is important to remember that during the dot-com bubble there were somewhere between two and five thousand VC funds started. Only a handful appear to consistently provide big returns over a long time, and those few probably owe more to their brand names (and ability to attract quality startups) than anything else at this point. Venture investing is a crapshoot, and very few people or funds manage to post good results year after year. This is hard work, as my friends in the VC community will attest. Many lesser-known funds will return complete goose-eggs, i.e. lose every dollar of the partners' investment.