Steve Judge, CEO of the Private Equity Growth Capital Council, last month wrote a post for peHUB titled “Confidentiality of limited partnership agreements is paramount.” The goal was to counteract growing calls for additional transparency, particularly for private equity funds whose limited partners include public pension systems.
Here was the key part of Judge’s argument:
“Like Coke’s secret recipe, LPAs contain proprietary and commercially sensitive trade secret information that, if disclosed, could undermine a private equity fund’s ability to invest and generate high returns for its limited partners. Overnight, competitors would have access to sensitive information, like the fund’s investment strategy, investment limitations, and key personnel that competitors could use to outbid the fund on a deal or otherwise disadvantage it in competitive negotiations.”
All of this would make sense, if only the underlying facts were legitimate.
The big problem for Judge and others making similar cases is that a set of limited partnership agreements has leaked out into the public sphere, including from such big-name sponsors as The Blackstone Group (BX), Cerberus, Kohlberg Kravis Roberts & Co. (KKR), New Mountain Partners and TPG Capital. And they don’t seem to contain the sorts of “secret recipes” that Judge is worried about being revealed.
For example, take the LPA for Blackstone Capital Partners V, a $21.7 billion global private equity fund raised before the financial crisis. In the 134 pages, I can find only a few paragraphs that specifically lay out the fund’s investment strategy — which is basically all-encompassing:
“Investments may include, for example, shares of common stock, partnership interests, shares of convertible preferred stock, convertible or non-convertible debt obligations, shares of preferred equity or debt obligations together with equity securities or warrants, rights or options to purchase equity securities, or other like arrangements.”
Yes, Blackstone does lay out a few limitations. For example, it will not participate in tender offers for control stakes of listed companies if a majority of the company’s board opposes the acquisition (save for bankruptcy proceedings). There also are some fairly common restrictions on the amount of fund capital that can be invested in a single portfolio company, and on certain types of debt transactions. But none of this is terribly uncommon, nor is it the sort of information that a Blackstone competitor could reasonably use to gain competitive advantage.
Then there is the issue of “key personnel.” Of Blackstone’s 2,000+ employees, only two are named in the LPA: CEO Steve Schwarzman and president Tony James. They are keymen, meaning that LPs could vote to vend the fund if both of them quit or get run over by a bus. All private equity funds have keymen, and it wouldn’t shock anyone to find out that Schwarmzan and James are Blackstone’s. Again, Schwarzman and James are the firm’s top two executives.
The real secret sauce in private equity partnership agreements are the dozens and dozens of pages about tax and fee structures. That’s what firms don’t want publicly disclosed.
The sooner private equity’s spokesmen are honest about this, the sooner we can have a real conversation about how to move forward.
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