ALTERNATIVE INVESTMENTS NEW DISCLOSURE LEGISLATION CALIFORNIA GOVERNMENT CODE SECTION (AB 2833) CA

Transcription

1 ALTERNATIVE INVESTMENTS NEW DISCLOSURE LEGISLATION CALIFORNIA GOVERNMENT CODE SECTION (AB 2833) CA California Association of Public Retirement Systems ATTORNEYS ROUNDTABLE Friday, February 3, 2017 San Jose, CA

2 Yuliya A. Oryol Partner Nossaman LLP 50 California Street, 34th Floor San Francisco, CA Tel: (415) Fax: (415) Susan L. Weiss Associate Counsel (Investments) Alameda County Employees Retirement Association th Street, Suite 1000 Oakland, CA Tel: (510) Fax: (510)

3 Government Code Section (CPRA) Current Requirements Under CPRA Subdivision (b) of Government Code Public plans are required to disclose certain financial information related to their Alternative Investments 2. Definition of Alternative Investments is narrow and limited to the following: a. Private Equity Funds b. Venture Funds c. Hedge Funds d. Absolute Return Funds 3. What about other asset classes? (Such as Private Equity Real Estate, Energy, Timber/Agriculture, Infrastructure or Debt, Credit, Secondaries, and Fund of Funds) 2

4 Government Code Section (AB 2833) D A. Government Code (AB 2833) Expands existing CPRA disclosures 1. Applies to new contracts entered into on or after January 1, Applies to existing contracts for which a new capital commitment is made on or after January 1, Public Plan is required to obtain certain information with respect to fees paid by Public Plan to fund manager. 4. Public Plan to undertake reasonable efforts to obtain information for any existing contract for which no new commitment was made on or after January 1, Public Plan to disclose fee information at a public meeting at least on an annual basis. 3

5 Government Code Section (AB 2833) B. Every Public Plan to require each fund manager of Alternative Investment Vehicle in which it invests to make following disclosures at least annually: 1. Fees and expenses that Public Plan pays directly to fund, fund manager, or related parties. 2. Public Plan s pro rata share of fees and expenses not included in (1) that are paid from fund to Public Plan. If Public Plan independently calculates this information, then fund will not be required to provide the information. 3. Public Plan s pro rata share of carried interest distributed to the fund manager or related parties. 4. Public Plan s pro rata share of aggregate fees and expenses paid by all of the portfolio companies held within fund to the fund manager or related parties. 4

6 Government Code Section (AB 2833) 5. Any additional information described in subdivision (b) of Section (CPRA). (i) (ii) (iii) (iv) (v) (vi) Name, address and vintage year of fund; Dollar amount since inception of Public Plan s commitment to fund; Dollar amount since inception of Public Plan s cash contributions to fund; Fiscal year-end dollar amount of fund s cash distributions received by Public Plan from fund; Fiscal year-end dollar amount of the remaining value of fund s assets attributable to the investment by Public Plan; Net internal rate of return of fund since inception; 5

7 Government Code Section (AB 2833) (vii) Investment multiple of fund since inception; (viii) Dollar amount of total management fees and costs paid by Public Plan on an annual fiscal year-end basis; and (ix) Annual fiscal year-end dollar amount of cash profit Public Plan has received from fund. 6. Public Plan s report to also include the gross and net rate of return of each fund, since inception, in which Public Plan participates. Public Plan may report the gross and net rate of return and information based on its own calculations or based on calculations provided by fund. 6

8 Government Code Section (AB 2833) C. Observations: 1. Definition of Alternative Investments - same in CPRA and Government Code Section Vague and unclear definitions of many terms (such as related parties). 3. GPs want LPs to calculate net and gross IRR (but LPs cannot calculate gross IRR). 4. GPs resist requirement to provide financial information on annual basis (such as July 1 st ) and require LPs to request it instead. 5. Unclear requirement to undertake reasonable efforts to obtain information and comply with reporting requirements in existing contract. 6. Portfolio fees/expenses and offsets. 7. Board education challenges. 8. Time and cost to prepare reporting/administrative burden. 9. Format and manner of disclosure unclear 10. ILPA Fee Reporting Template broader/more favorable to LPs. 7

9 SAMPLE SIDE LETTER PROVISION Public Inspections; Public Disclosure. A. The General Partner hereby acknowledges and agrees that the Investor is a public agency subject to state laws, including, without limitation, (a) the California Public Records Act (Cal. Govt. Code 6250, et seq.) (the Public Records Act ), which provides generally that all records relating to a public agency s business are open to public inspection and copying unless exempted under the Public Records Act, (b) the Ralph M. Brown Act (Cal. Govt. Code et seq.) (the Brown Act ), which provides generally for open meetings for local legislative bodies, and (c) the California Government Code Section ( Cal. Govt. Code ) which provides generally that public pension systems in California obtain and publicly disclose certain information regarding fees, expenses and returns from the funds in which they invest. In connection with the foregoing: a. Pursuant to Cal. Govt. Code (b) and Cal. Govt. Code , the General Partner will provide and the Investor intends to disclose periodically: (A) the name, address and vintage year of the Fund; (B) the date the investment was made by the Investor; (C) the dollar amount of capital committed by the Investor to the Fund since inception; (D) the dollar amount of the Investor cash drawn by the Fund since inception; (E) the dollar amount (on a fiscal year-end basis) of cash returned to the Investor by the Fund; (F) the market value of the Fund s assets attributable to the Investor s investment in the Fund; (G) the dollar amount of management fees and expenses paid by the Investor on an annual fiscal year-end basis; (H) the Fund s net internal rate of return ( IRR ) since inception and resulting investment multiple of the Investor s investment in the Fund since inception; and (I) the dollar amount of cash profit received by the Investor from the Fund on a fiscal year-end basis. 8

10 SAMPLE SIDE LETTER PROVISION b. Pursuant to Cal. Govt. Code , the General Partner shall provide on at least an annual basis, by July 31 of each year, and the Investor shall have the right to disclose periodically: (A) the fees and expenses that the Investor pays directly to the Fund, the fund manager or related parties; (B) the Investor s pro rata share of fees and expenses not included in subparagraph (b)(a) that are paid from the Fund to the fund investment manager or related parties; (C) the Investor s pro rata share of carried interest distributed by the Fund to the fund investment manager or related parties; (D) the Investor s pro rata share of aggregate fees and expenses paid by all of the portfolio companies held by the Fund to the General Partner or related parties; and (E) the gross and net IRR of the Fund, since inception. c. Based on the foregoing, (i) the General Partner consents in advance to the Investor s disclosure of the information listed at paragraphs (a) and (b) with respect to the Fund and any such disclosure shall not constitute a breach of the Fund Agreement, and (ii) neither the Fund, nor the General Partner shall make any claim against the Investor if the Investor makes available to the public any report, notice or other information the Investor received from the Fund or the General Partner, which was required to be made public by the Investor pursuant to the Public Records Act, the Brown Act, and/or Cal. Govt. Code In addition to the foregoing, to the extent that additional information is required for the Investor to comply with Cal. Govt. Code , the General Partner shall use commercially reasonable efforts, subject to the terms of the Fund Agreement and applicable law, to provide such additional information upon request. The Investor agrees that it shall seek, to the extent available, confidential treatment with respect to any public disclosure of information furnished to the Investor by the General Partner. 9

11 SAMPLE SIDE LETTER PROVISION d. Each of the General Partner agrees that it shall provide the Investor with information required by the Fee Reporting Template, Version 1.0 and as may be amended from time to time, prescribed by the Institutional Limited Partners Association (ILPA), and the gross and net IRR of the Fund since inception, by July 31 of each year in which Investor is a Limited Partner in the Fund (collectively, the Required Information ). Any terms set forth in the Required Information shall be interpreted in accordance with California law. 10