Hack Attack

Political crisis typically gives birth to a pair of well-intentioned, albeit feuding, siblings: Smart reform that solves problems, and dumb reform that exacerbates them. So imagine my surprise when I looked through the nursery window at the Ohio Bureau of Workers’ Compensation, and found only one crib filled. It seems that smart reform was stillborn; while only dumb reform survived, staring intently at the glint off a rare coin.

In six days, OBWC will release enough sensitive information that it will never again receive access to a private equity fund. Not a venture capital fund, not a buyout fund, not a mezzanine fund and not a fund-of-funds. In fact, I’d be surprised if it even received much detailed information for the 68 funds in which it already has invested.

Part of me thinks that this is preemptive restraint, like when I don’t bring my ATM card to a casino. After all, what better way to prevent future alternative investment scandal than by removing the ability to make alternative investments? This really isn’t a joke, since OBWC already has fired each of its domestic and international equity managers, in favor of an all-fixed income portfolio (save for the existing, and illiquid, private equity fund commitments).

So if this is intentional strategy, then it is simply a case of political cowardice. Sure that’s bad, but imagine the alternative: OBWC leadership will release the information because it doesn’t know any better. This second scenario is significantly worse, because it means that incompetents will be investing beneficiary dollars for years to come. It’s a lose-lose, but some losses are worse than others (e.g., ball through Bucker’s legs vs. ball through Graffanino’s legs).

As longtime readers know, I am usually in favor of public disclosure of private equity information. Public pensioners have a right to know how their money is being spent, and if their fiduciaries are behaving badly. This sometimes can have adverse consequences, like when a small group of VC firms (Sequoia, CRV, etc.) refuse to take public monies, but the vast majority of private equity funds have drawn a bright line between fund-level and portfolio-level information. The former can be released because the most adverse effect is embarrassment, whereas the latter must remain protected confidential because its release would constitute a competitive disadvantage. There is not an OBWC beneficiary between Cincinnati and Youngtown whose interests would be best served by knowing how Draper Fisher Triangle valued its latest nanotech startup, so long as he already knew the total portfolio valuation, and that said valuation had been confirmed by a third-party consultant (Ennis Knupp).

Now this isn’t to say that there shouldn’t be certain exceptions. If Ennis Knupp found that certain private equity firms vastly overstated their valuations – particularly in an effort to secure follow-on commitments – this should be exposed. If Ennis Knupp determined that certain commitments were made for political, rather than for ROI, reasons, this also should be exposed. Bad acts and their actors have no rights to confidentiality when they have abused the public sphere.

But, again, OBWC is proposing to release information – including meeting notes – for each firm that has taken OBWC money. This includes firms that have done nothing wrong, which I’d assume would be almost all, if not all. The only result can be that OBWC beneficiaries will be denied future access to an asset class that has traditionally outperformed most public indices, and which helps provide greater portfolio diversification. These beneficiaries might be told things like: “We’re not kgoing to keep this information secret just to help out The Carlyle Group,” with the hopes of generating cheers from the already-wronged masses. But the joke will be on the masses, who simply are being wronged even further.

The OBWC has six shopping days left until it further harms its beneficiaries. Hopefully it gets religion before then.

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