Private Equity’s Mighty Battle Against Public Pension Transparency

Read a private equity prospectus closely and you\’ll quickly learn why PE firms resist public … [+] scrutiny like vampires run from sunlight.


Private equity firms widely distribute their prospectuses and offering materials to prospective wealthy investors as they trawl globally to raise capital for their costly, high-risk funds. Yet when state and local government pension stakeholders request prospectuses of the funds in which their pensions invest, PE firms claim these very same broadly disseminated documents are “trade secrets” exempt from disclosure under state public records laws. On the one hand, PE risks, fees, and questionable business practices are fully disclosed via prospectus to wealthy investors who can afford to gamble. On the other, government workers in severely underfunded pensions (many of whom have already seen their retirement benefits cut) and taxpayers who are on the hook for any public pension gambling losses, are intentionally kept in the dark. SEC and state securities regulators should demand that every PE investor, including public pension stakeholders, be provided with all material investment information related to these risky investments and end PE secret fleecing of government workers’ pensions.

Read a private equity prospectus, offering memorandum, limited partnership or subscription agreement closely and you’ll quickly learn why these funds resist public scrutiny like vampires run from sunlight.

As I detail in my recent book, How to Steal A lot of Money—Legally, these documents are replete with outrageous, damning disclosures. Most egregious are the disclosures that (1) every investor in these funds may be treated differently, e.g., certain investors will receive fee, transparency and liquidity preferences which will detrimentally impact other investors; and (2) the fund manager may engage in myriad forms of enriching self-dealing which may harm investors.

As problematic as these disclosures should be to any rational investor, wealthy investors often are willing to gamble a limited percentage of their savings in PE funds that promise (and more-often-than not don’t deliver) market-beating returns. Wealthy investors are routinely provided with prospectuses before they invest, as the federal and state securities laws require.  Fund prospectuses contain details on investment objectives, risks, conflicts of interest, strategies, performance, fees, and fund management.

For any given PE fund, hundreds or thousands of prospectuses are distributed to wealthy investors globally, as well as to consultants and advisors to the well-heeled. These investors and intermediaries are not forewarned that “trade secrets” are included in these documents—proprietary business information which the investor may not lawfully discuss or disclose to anyone. To the contrary, PE managers count on wealthy investors and intermediaries discussing and recommending their costly funds to others. That’s a key element in PE marketing schemes. To my knowledge, no wealthy investor or intermediary has ever been sued for simply disclosing the contents of a PE prospectus. There are no true secrets here—just ugly business practices which wealthy investors often choose to overlook.

Public pensions, which are subject to state Freedom of Information or public records laws, are supposed to be the most transparent of institutional investors. The investment of public monies is supposed to be open to public scrutiny and accountability.

Further, unlike wealthy investor discretionary savings, public pension assets secure retirement promises made to middle-income workers. These investors, aka workers, cannot afford to gamble their retirement assets and would never knowingly consent to many of the unsavory features of PE investments disclosed in the prospectuses.

So, to conceal the reckless gambling, PE managers and public pension officials struck an unholy deal about 15 years ago: Don’t ask, don’t tell. That is, these pensions agreed not to ask PE managers to provide fund prospectuses to stakeholders and the PE firms happily agreed not to tell stakeholders the ugly truth about their business practices.

PE firms and public pension officials agreed to conspire to withhold prospectuses containing critical investment information—information securities regulators agree every investor should read before investing—from workers whose retirement savings are at risk. Public pension stakeholders were not informed of this nasty agreement.

How is it that the SEC and state securities regulators have allowed PE firms to sell their high-cost, high-risk funds to public pensions established to fund government workers’ retirement security without providing prospectuses detailing the costs and risks for the past 15 years? That’s a question every public pension stakeholder should be asking.