As Start-Ups Fail, Venture Investors Back Out in Droves Financing: The
stampede to put money into tech has reversed direction, with some
partners selling out at a loss. April 14, 2001 | JOSEPH MENN | TIMES
STAFF WRITER For the last three years, investors large and small have
been clamoring at the gates of American venture capital funds, begging
for a chance to put money into technology start-ups. The funds provided
early financing for such companies as Amazon.com Inc., Sun Microsystems
Inc. and America Online Inc. before their initial stock offerings,
turning millions of dollars into billions for an elite group of
university endowments, pension funds and individuals worth at least $1
million. Just as suddenly, the stampede to get in has reversed
direction. And some of the dot-com chief executives who made it into the
party, committing to invest millions over a decade or so, are trying to
back out of their obligations. "It's hard to imagine the speed with
which it has happened," said Jon Staenberg of Staenberg Venture
Partners, based in Seattle. He has fielded withdrawal inquiries from two
investors in his $100-million venture fund who now have cold feet. Both
are executives at companies whose market value tumbled by 90% or more.
An overall decline in venture financing this year was already expected,
since the amount put into start-ups soared 80% to a record $68.8 billion
last year, according to research firm VentureOne. Fund returns to
investors went negative in the fourth quarter of 2000 for the first time
in more than two years, research firm Venture Economics said this week.
It won't be hard for the top venture capital firms, such as Amazon
funder Kleiner Perkins Caufield & Byers, to raise cash. Those firms
have turned away hundreds of would-be limited partners in the past,
instead rewarding executives at companies they backed with permission to
invest. Many venture capital firms refuse to discuss the new
nervousness among their funders. "People are talking about it in hushed
tones, with great reluctance," Staenberg said. Those who will talk say
the pull-out isn't severe enough to impair the amount they invest in new
technologies, one of the major engines for economic growth in the last
decade. That's because individuals provide less than 20% of all venture
financing. But some are concerned that investments from big institutions
might decline for another reason: Many of them have financial plans
that call for allocating 5% or 10% of their assets to venture funds.
With those institutions' total portfolios shrinking along with the stock
market, that 5% or 10% works out to a lot less cash. On Friday, the
giant California Public Employees' Retirement System reported that it
lost 5.3% of its assets in February alone, wiping out $9 billion in
value. Barry Gonder, a senior investment officer at CalPERS, said it
seems unlikely that the system's total assets would slide so far that it
would have to cut back on future venture investments. "We're at about
5% [of total assets] today, and I can go as high as 8%," he said. "We'll
probably become more selective." The individual attempts to withdraw
are putting venture capital funds in a delicate position. If they
politely allow cash-crunched limited partners to back out, others who
simply dislike the firms' investment picks might try to follow suit.
"People get caught in the position of do they want to put good money
after bad?" said Brent Nicklas of private equity firm Lexington Partners
in New York. "I've never seen it quite as widespread." Venture capital
partnership agreements typically last seven to 10 years, and the
penalties for early withdrawal can be harsh. In some cases, if an
investor pulls out when the venture capital firm asks for a new round of
promised money, the partner can lose 50% of what it already put in. The
profits that the investor had earned to date also can be rolled over to
satisfy at least part of the obligation. If that's not enough to meet
the capital call, the venture capital firm can sue--an unpleasant step
in a business built largely on personal relationships. The least painful
way out for a desperate limited partner is to sell to another partner
or to dump an unwanted deal on the little-known but growing secondary
market, where a few firms specialize in buying limited partnership
interests. As tax bills come due, an increasing number of limited
partners are doing just that, unloading their holdings for less than 50
cents on the dollar. "We are seeing more sellers than we did six months
ago, but the quality has gone down," said Jerold Newman, president of
secondary buyer Willow Ridge Inc. in New York. Another buyer is
Nicklas' firm, which takes on soured investment deals worth as little as
$1 million--or as much as $1 billion--when a bank or other major
institution decides to sell off an entire portfolio. Many more calls
from individuals are coming into Lexington's Santa Clara office now than
six months ago, Nicklas said. "It's up, and I think it's going to
continue to increase through the end of this year," he said. "A lot of
last year's money came from new entrants into the market, including
high-net-worth individuals at companies that the VCs had backed." A
significant complication for those trying to sell off their investments
is the difficulty in figuring out how much their stakes are worth.
Venture funds often wait until two months after the end of a quarter
before estimating how much their portfolio of public and private
holdings is worth. Those trying to sell now are using valuation
statements from December, before much of the stock slump. The funds also
often use numbers designed to make their returns look the best,
according to Stephen Lisson of InsiderVC.com. It's common for them to
mark up the value of private companies as stocks in similar firms rise,
then decline to mark them down again until forced to do so by an event
such as a takeover or a bankruptcy. And these days, it's impossible to
tell which companies are going to be around in a year. "Valuations are
somewhat irrelevant if the company is going to run out of money,"
Nicklas said. With struggling firms more likely to return to the hand
that fed them for another round of financing, it's up to the venture
capital firms to decide whether their offspring live or die. "How do you
predict or handicap or bet on what the venture guys are going to do?
When you sit down with them, they tell you that even they don't know,"
Nicklas said. As Start-Ups Fail, Venture Investors Back Out in Droves -
Los Angeles Times
http://articles.latimes.com/print/2001/apr/14/business/fi-50936
Steve Lisson | Stephen Lisson | Stephen N. Lisson | Austin TX | Austin Texas
2014
Steve Lisson | Stephen Lisson | Stephen N. Lisson | Austin TX | Austin Texas
Steve Lisson | Stephen Lisson | Stephen N. Lisson | Austin TX | Austin Texas
|
Steve Lisson, Stephen Lisson, Stephen N. Lisson, Austin Texas
Steve Lisson, Stephen Lisson, Stephen N. Lisson, Austin Texas
PhillyDeals: Pa. pension system shakes
up advisers
Retirement
Pension System
Find More Stories About
Pa. pension data leave questions
about returns
Collections • Retirement
By Joseph N. DiStefano INQUIRER STAFF WRITER
POSTED: October 13, 2005
As pension funds shift more assets to "alternative" investments that
don't trade on stock or bond markets, it's getting harder to tell what
they're really worth - or how big a subsidy they'll need to provide
pensions to future retirees.
For example, take the Pennsylvania Public School Employees'
Retirement System, which, at The Inquirer's request, has disclosed
some of the performance data it uses in estimating its profits from
nearly 100 private-equity and venture-capital funds.
The system has invested about one-tenth of its assets, or $5 billion,
with private-equity and venture-capital firms in the last 10 years.
By the end of last year, the funds had returned about $3 billion of the
total investment, according to the retirement system's annual reports
to pensioners and the General Assembly. More than 70 percent of the fund's private-equity and venture-capital managers - most
of which were hired during the investment boom years of 1997 to 2001 - had yet to pay back the state's investment, let alone
realize any profit.
Yet the retirement system claims total annual returns from these investments of about 6 percent a year since 1999, 8 percent a
year since 2001, and 21 percent in 2004 alone. That is roughly two to three times what the system's U.S. stock investments
returned during those periods, and far above its U.S. stock benchmark, the Dow Jones Wilshire 5000 Index. New Jersey is also
considering investing in private equity.
How does the teachers' retirement system - like other buyers and managers of alternative investments - report such positive
numbers? They count not just the cash they actually collect, but also estimated profits from investments that have not yet been
liquidated.
Because no one knows how much those investments in small and often unproven companies will earn, the system relies on
estimates from the outside managers who make the investments; the managers calculate an "internal rate of return" based on
their best guess of what the investments might be worth someday, using, for example, the values of publicly traded companies in
similar industries.
The teachers' pension system is not as big a user of alternative investments as the Pennsylvania State Employees' Retirement
System, which pays pensions to retired state workers. But the teachers' system is more open about the performance of dozens
of managers it hires to handle the funds.
The teachers' system uses a combination of investment profits and subsidies from local school districts, state government, and
deductions from teachers' paychecks to pay pensions to more than 150,000 retired school employees.
The more the retirement systems make from investments, the less they need in subsidies from state taxpayers. For the
teachers' system, local school districts and property-tax-payers help foot the bill. That makes investment performance a matter
of public concern as subsidy levels are calculated each year.
Though it relies on managers' estimates of the value of each alternative investment portfolio and uses them to calculate the
portfolio's overall performance, the teachers' system does not disclose the underlying data in its yearly reports to pensioners
and state legislators.
The system reports assets, payouts and fees, but not each manager's performance - let alone the names of the companies or
properties in which alternative managers invest.
"We don't get many requests" for manager performance data from pension-fund members, and virtually none from legislators,
said Evelyn Tatkovski, spokeswoman for the teachers' retirement system. She added that the system considers not only how
profitable alternative investments may be, but also the benefits of "diversifying our investment portfolio" beyond stocks and
bonds.
But the teachers' system has provided to The Inquirer an estimate of the value of its remaining investments for 78 of its 96
venture-capital and private-equity managers. For 18 others, the system would not provide the estimated value.
In most cases, those 18 investments date to 1999 or earlier, and managers have already sold most of their assets, Tatkovski
said. Still, the teachers' system wants to keep the remaining value confidential because "release of this information would harm
the partnerships by indirectly providing confidential information" on the "small number of properties [or] portfolio companies"
remaining in each fund, she said.
Steve Lisson, publisher of the Texas-based private-equity newsletter InsiderVC.com, questioned the teachers' system's basis for
not disclosing estimated values.
"By that point in a fund's life, the investments are mature and their valuations [are typically] well-known," Lisson said. "They are furiously trying to exit the investment, shopping it and its valuation to any greater fool with a pulse."
Lisson added, "Fund managers love to brag about returns in the good times, and then complain about confidentiality when
they're not performing well."
Tatkovski said the teachers' retirement system kept that data secret partly because it believes that is a good policy, and partly
because some investment managers ask it to do so.
Among the remaining estimated investment values that the system will not release, some are from funds that made money during
the bull-market years of the 1990s. Edison Venture Partners, of Princeton, has returned more than $52 million from investments
in 1991 and 1994 that totaled $25 million. TL Ventures, of Wayne, turned $60 million, invested in 1992 and 1997, into a total of
$83 million in cash. The teachers' system will not say what either firm's remaining investments are worth.
Other investments whose current value the teachers' system will not disclose have so far been money-losers. The teachers put
$56 million into investment firm Houlihan, Lokey, Howard & Zukin's Sunrise Investment Partnership in 1998, but had only $5
million to show for it at the end of last year. The system put $180 million into Deutsche European Partners IV in 1999, and was
still $44 million short of showing a profit as of Dec. 31.
The teachers' system also provided estimates of the value of investments held by 25 real estate funds, withholding the
information for certain funds managed by Lazard Freres Real Estate Investors and Whitehall Street Real Estate Funds.
The system says its overall real estate portfolio, which equals around 5 percent of its total assets (not counting real estate
investment trusts, which trade on the stock market), has been more profitable than any other asset class in the last five years,
returning an average of more than 12 percent, and rising to 25 percent in 2004.
Last year, the two systems paid a total of $386 million to more than 300 private firms that manage state investments. Of that
total, $260 million was paid to managers of private equity, venture capital, real estate, hedge funds (at the state employees'
system), and other alternative-investment managers, which accounted for less than one-third of the systems' combined
investments.
Contact staff writer Joseph N. DiStefano at 215-843-4947 or jdistefano@phillynews.com.
Pa. pension data leave questions about returns - Philly.com http://articles.philly.com/2005-10-13/business/25443104_1_pension-syst...
2 of 2
Steve Lisson, Stephen Lisson, Stephen N. Lisson, Austin Texas
PhillyDeals: Pa. pension system shakes
up advisers
Retirement
Pension System
Find More Stories About
Pa. pension data leave questions
about returns
Collections • Retirement
By Joseph N. DiStefano INQUIRER STAFF WRITER
POSTED: October 13, 2005
As pension funds shift more assets to "alternative" investments that
don't trade on stock or bond markets, it's getting harder to tell what
they're really worth - or how big a subsidy they'll need to provide
pensions to future retirees.
For example, take the Pennsylvania Public School Employees'
Retirement System, which, at The Inquirer's request, has disclosed
some of the performance data it uses in estimating its profits from
nearly 100 private-equity and venture-capital funds.
The system has invested about one-tenth of its assets, or $5 billion,
with private-equity and venture-capital firms in the last 10 years.
By the end of last year, the funds had returned about $3 billion of the
total investment, according to the retirement system's annual reports
to pensioners and the General Assembly. More than 70 percent of the fund's private-equity and venture-capital managers - most
of which were hired during the investment boom years of 1997 to 2001 - had yet to pay back the state's investment, let alone
realize any profit.
Yet the retirement system claims total annual returns from these investments of about 6 percent a year since 1999, 8 percent a
year since 2001, and 21 percent in 2004 alone. That is roughly two to three times what the system's U.S. stock investments
returned during those periods, and far above its U.S. stock benchmark, the Dow Jones Wilshire 5000 Index. New Jersey is also
considering investing in private equity.
How does the teachers' retirement system - like other buyers and managers of alternative investments - report such positive
numbers? They count not just the cash they actually collect, but also estimated profits from investments that have not yet been
liquidated.
Because no one knows how much those investments in small and often unproven companies will earn, the system relies on
estimates from the outside managers who make the investments; the managers calculate an "internal rate of return" based on
their best guess of what the investments might be worth someday, using, for example, the values of publicly traded companies in
similar industries.
The teachers' pension system is not as big a user of alternative investments as the Pennsylvania State Employees' Retirement
System, which pays pensions to retired state workers. But the teachers' system is more open about the performance of dozens
of managers it hires to handle the funds.
The teachers' system uses a combination of investment profits and subsidies from local school districts, state government, and
deductions from teachers' paychecks to pay pensions to more than 150,000 retired school employees.
The more the retirement systems make from investments, the less they need in subsidies from state taxpayers. For the
teachers' system, local school districts and property-tax-payers help foot the bill. That makes investment performance a matter
of public concern as subsidy levels are calculated each year.
Though it relies on managers' estimates of the value of each alternative investment portfolio and uses them to calculate the
portfolio's overall performance, the teachers' system does not disclose the underlying data in its yearly reports to pensioners
and state legislators.
The system reports assets, payouts and fees, but not each manager's performance - let alone the names of the companies or
properties in which alternative managers invest.
"We don't get many requests" for manager performance data from pension-fund members, and virtually none from legislators,
said Evelyn Tatkovski, spokeswoman for the teachers' retirement system. She added that the system considers not only how
profitable alternative investments may be, but also the benefits of "diversifying our investment portfolio" beyond stocks and
bonds.
But the teachers' system has provided to The Inquirer an estimate of the value of its remaining investments for 78 of its 96
venture-capital and private-equity managers. For 18 others, the system would not provide the estimated value.
In most cases, those 18 investments date to 1999 or earlier, and managers have already sold most of their assets, Tatkovski
said. Still, the teachers' system wants to keep the remaining value confidential because "release of this information would harm
the partnerships by indirectly providing confidential information" on the "small number of properties [or] portfolio companies"
remaining in each fund, she said.
Steve Lisson, publisher of the Texas-based private-equity newsletter InsiderVC.com, questioned the teachers' system's basis for
not disclosing estimated values.
"By that point in a fund's life, the investments are mature and their valuations [are typically] well-known," Lisson said. "They are furiously trying to exit the investment, shopping it and its valuation to any greater fool with a pulse."
Lisson added, "Fund managers love to brag about returns in the good times, and then complain about confidentiality when
they're not performing well."
Tatkovski said the teachers' retirement system kept that data secret partly because it believes that is a good policy, and partly
because some investment managers ask it to do so.
Among the remaining estimated investment values that the system will not release, some are from funds that made money during
the bull-market years of the 1990s. Edison Venture Partners, of Princeton, has returned more than $52 million from investments
in 1991 and 1994 that totaled $25 million. TL Ventures, of Wayne, turned $60 million, invested in 1992 and 1997, into a total of
$83 million in cash. The teachers' system will not say what either firm's remaining investments are worth.
Other investments whose current value the teachers' system will not disclose have so far been money-losers. The teachers put
$56 million into investment firm Houlihan, Lokey, Howard & Zukin's Sunrise Investment Partnership in 1998, but had only $5
million to show for it at the end of last year. The system put $180 million into Deutsche European Partners IV in 1999, and was
still $44 million short of showing a profit as of Dec. 31.
The teachers' system also provided estimates of the value of investments held by 25 real estate funds, withholding the
information for certain funds managed by Lazard Freres Real Estate Investors and Whitehall Street Real Estate Funds.
The system says its overall real estate portfolio, which equals around 5 percent of its total assets (not counting real estate
investment trusts, which trade on the stock market), has been more profitable than any other asset class in the last five years,
returning an average of more than 12 percent, and rising to 25 percent in 2004.
Last year, the two systems paid a total of $386 million to more than 300 private firms that manage state investments. Of that
total, $260 million was paid to managers of private equity, venture capital, real estate, hedge funds (at the state employees'
system), and other alternative-investment managers, which accounted for less than one-third of the systems' combined
investments.
Contact staff writer Joseph N. DiStefano at 215-843-4947 or jdistefano@phillynews.com.
Pa. pension data leave questions about returns - Philly.com http://articles.philly.com/2005-10-13/business/25443104_1_pension-syst...
2 of 2
Steve Lisson, Stephen Lisson, Stephen N. Lisson, Austin Texas
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Pa. pension system shakes up advisers Retirement Pension System
Steve Lisson, Stephen Lisson, Stephen N. Lisson, Austin Texas
2014
Steve Lisson, Stephen Lisson, Stephen N. Lisson, Austin Texas
PhillyDeals: Pa. pension system shakes
up advisers
Retirement
Pension System
Find More Stories About
Pa. pension data leave questions
about returns
Collections • Retirement
By Joseph N. DiStefano INQUIRER STAFF WRITER
POSTED: October 13, 2005
As pension funds shift more assets to "alternative" investments that
don't trade on stock or bond markets, it's getting harder to tell what
they're really worth - or how big a subsidy they'll need to provide
pensions to future retirees.
For example, take the Pennsylvania Public School Employees'
Retirement System, which, at The Inquirer's request, has disclosed
some of the performance data it uses in estimating its profits from
nearly 100 private-equity and venture-capital funds.
The system has invested about one-tenth of its assets, or $5 billion,
with private-equity and venture-capital firms in the last 10 years.
By the end of last year, the funds had returned about $3 billion of the
total investment, according to the retirement system's annual reports
to pensioners and the General Assembly. More than 70 percent of the fund's private-equity and venture-capital managers - most
of which were hired during the investment boom years of 1997 to 2001 - had yet to pay back the state's investment, let alone
realize any profit.
Yet the retirement system claims total annual returns from these investments of about 6 percent a year since 1999, 8 percent a
year since 2001, and 21 percent in 2004 alone. That is roughly two to three times what the system's U.S. stock investments
returned during those periods, and far above its U.S. stock benchmark, the Dow Jones Wilshire 5000 Index. New Jersey is also
considering investing in private equity.
How does the teachers' retirement system - like other buyers and managers of alternative investments - report such positive
numbers? They count not just the cash they actually collect, but also estimated profits from investments that have not yet been
liquidated.
Because no one knows how much those investments in small and often unproven companies will earn, the system relies on
estimates from the outside managers who make the investments; the managers calculate an "internal rate of return" based on
their best guess of what the investments might be worth someday, using, for example, the values of publicly traded companies in
similar industries.
The teachers' pension system is not as big a user of alternative investments as the Pennsylvania State Employees' Retirement
System, which pays pensions to retired state workers. But the teachers' system is more open about the performance of dozens
of managers it hires to handle the funds.
The teachers' system uses a combination of investment profits and subsidies from local school districts, state government, and
deductions from teachers' paychecks to pay pensions to more than 150,000 retired school employees.
The more the retirement systems make from investments, the less they need in subsidies from state taxpayers. For the
teachers' system, local school districts and property-tax-payers help foot the bill. That makes investment performance a matter
of public concern as subsidy levels are calculated each year.
Though it relies on managers' estimates of the value of each alternative investment portfolio and uses them to calculate the
portfolio's overall performance, the teachers' system does not disclose the underlying data in its yearly reports to pensioners
and state legislators.
The system reports assets, payouts and fees, but not each manager's performance - let alone the names of the companies or
properties in which alternative managers invest.
"We don't get many requests" for manager performance data from pension-fund members, and virtually none from legislators,
said Evelyn Tatkovski, spokeswoman for the teachers' retirement system. She added that the system considers not only how
profitable alternative investments may be, but also the benefits of "diversifying our investment portfolio" beyond stocks and
bonds.
But the teachers' system has provided to The Inquirer an estimate of the value of its remaining investments for 78 of its 96
venture-capital and private-equity managers. For 18 others, the system would not provide the estimated value.
In most cases, those 18 investments date to 1999 or earlier, and managers have already sold most of their assets, Tatkovski
said. Still, the teachers' system wants to keep the remaining value confidential because "release of this information would harm
the partnerships by indirectly providing confidential information" on the "small number of properties [or] portfolio companies"
remaining in each fund, she said.
Steve Lisson, publisher of the Texas-based private-equity newsletter InsiderVC.com, questioned the teachers' system's basis for
not disclosing estimated values.
"By that point in a fund's life, the investments are mature and their valuations [are typically] well-known," Lisson said. "They are furiously trying to exit the investment, shopping it and its valuation to any greater fool with a pulse."
Lisson added, "Fund managers love to brag about returns in the good times, and then complain about confidentiality when
they're not performing well."
Tatkovski said the teachers' retirement system kept that data secret partly because it believes that is a good policy, and partly
because some investment managers ask it to do so.
Among the remaining estimated investment values that the system will not release, some are from funds that made money during
the bull-market years of the 1990s. Edison Venture Partners, of Princeton, has returned more than $52 million from investments
in 1991 and 1994 that totaled $25 million. TL Ventures, of Wayne, turned $60 million, invested in 1992 and 1997, into a total of
$83 million in cash. The teachers' system will not say what either firm's remaining investments are worth.
Other investments whose current value the teachers' system will not disclose have so far been money-losers. The teachers put
$56 million into investment firm Houlihan, Lokey, Howard & Zukin's Sunrise Investment Partnership in 1998, but had only $5
million to show for it at the end of last year. The system put $180 million into Deutsche European Partners IV in 1999, and was
still $44 million short of showing a profit as of Dec. 31.
The teachers' system also provided estimates of the value of investments held by 25 real estate funds, withholding the
information for certain funds managed by Lazard Freres Real Estate Investors and Whitehall Street Real Estate Funds.
The system says its overall real estate portfolio, which equals around 5 percent of its total assets (not counting real estate
investment trusts, which trade on the stock market), has been more profitable than any other asset class in the last five years,
returning an average of more than 12 percent, and rising to 25 percent in 2004.
Last year, the two systems paid a total of $386 million to more than 300 private firms that manage state investments. Of that
total, $260 million was paid to managers of private equity, venture capital, real estate, hedge funds (at the state employees'
system), and other alternative-investment managers, which accounted for less than one-third of the systems' combined
investments.
Contact staff writer Joseph N. DiStefano at 215-843-4947 or jdistefano@phillynews.com.
Pa. pension data leave questions about returns - Philly.com http://articles.philly.com/2005-10-13/business/25443104_1_pension-syst...
2 of 2
Steve Lisson, Stephen Lisson, Stephen N. Lisson, Austin Texas
PhillyDeals: Pa. pension system shakes
up advisers
Retirement
Pension System
Find More Stories About
Pa. pension data leave questions
about returns
Collections • Retirement
By Joseph N. DiStefano INQUIRER STAFF WRITER
POSTED: October 13, 2005
As pension funds shift more assets to "alternative" investments that
don't trade on stock or bond markets, it's getting harder to tell what
they're really worth - or how big a subsidy they'll need to provide
pensions to future retirees.
For example, take the Pennsylvania Public School Employees'
Retirement System, which, at The Inquirer's request, has disclosed
some of the performance data it uses in estimating its profits from
nearly 100 private-equity and venture-capital funds.
The system has invested about one-tenth of its assets, or $5 billion,
with private-equity and venture-capital firms in the last 10 years.
By the end of last year, the funds had returned about $3 billion of the
total investment, according to the retirement system's annual reports
to pensioners and the General Assembly. More than 70 percent of the fund's private-equity and venture-capital managers - most
of which were hired during the investment boom years of 1997 to 2001 - had yet to pay back the state's investment, let alone
realize any profit.
Yet the retirement system claims total annual returns from these investments of about 6 percent a year since 1999, 8 percent a
year since 2001, and 21 percent in 2004 alone. That is roughly two to three times what the system's U.S. stock investments
returned during those periods, and far above its U.S. stock benchmark, the Dow Jones Wilshire 5000 Index. New Jersey is also
considering investing in private equity.
How does the teachers' retirement system - like other buyers and managers of alternative investments - report such positive
numbers? They count not just the cash they actually collect, but also estimated profits from investments that have not yet been
liquidated.
Because no one knows how much those investments in small and often unproven companies will earn, the system relies on
estimates from the outside managers who make the investments; the managers calculate an "internal rate of return" based on
their best guess of what the investments might be worth someday, using, for example, the values of publicly traded companies in
similar industries.
The teachers' pension system is not as big a user of alternative investments as the Pennsylvania State Employees' Retirement
System, which pays pensions to retired state workers. But the teachers' system is more open about the performance of dozens
of managers it hires to handle the funds.
The teachers' system uses a combination of investment profits and subsidies from local school districts, state government, and
deductions from teachers' paychecks to pay pensions to more than 150,000 retired school employees.
The more the retirement systems make from investments, the less they need in subsidies from state taxpayers. For the
teachers' system, local school districts and property-tax-payers help foot the bill. That makes investment performance a matter
of public concern as subsidy levels are calculated each year.
Though it relies on managers' estimates of the value of each alternative investment portfolio and uses them to calculate the
portfolio's overall performance, the teachers' system does not disclose the underlying data in its yearly reports to pensioners
and state legislators.
The system reports assets, payouts and fees, but not each manager's performance - let alone the names of the companies or
properties in which alternative managers invest.
"We don't get many requests" for manager performance data from pension-fund members, and virtually none from legislators,
said Evelyn Tatkovski, spokeswoman for the teachers' retirement system. She added that the system considers not only how
profitable alternative investments may be, but also the benefits of "diversifying our investment portfolio" beyond stocks and
bonds.
But the teachers' system has provided to The Inquirer an estimate of the value of its remaining investments for 78 of its 96
venture-capital and private-equity managers. For 18 others, the system would not provide the estimated value.
In most cases, those 18 investments date to 1999 or earlier, and managers have already sold most of their assets, Tatkovski
said. Still, the teachers' system wants to keep the remaining value confidential because "release of this information would harm
the partnerships by indirectly providing confidential information" on the "small number of properties [or] portfolio companies"
remaining in each fund, she said.
Steve Lisson, publisher of the Texas-based private-equity newsletter InsiderVC.com, questioned the teachers' system's basis for
not disclosing estimated values.
"By that point in a fund's life, the investments are mature and their valuations [are typically] well-known," Lisson said. "They are furiously trying to exit the investment, shopping it and its valuation to any greater fool with a pulse."
Lisson added, "Fund managers love to brag about returns in the good times, and then complain about confidentiality when
they're not performing well."
Tatkovski said the teachers' retirement system kept that data secret partly because it believes that is a good policy, and partly
because some investment managers ask it to do so.
Among the remaining estimated investment values that the system will not release, some are from funds that made money during
the bull-market years of the 1990s. Edison Venture Partners, of Princeton, has returned more than $52 million from investments
in 1991 and 1994 that totaled $25 million. TL Ventures, of Wayne, turned $60 million, invested in 1992 and 1997, into a total of
$83 million in cash. The teachers' system will not say what either firm's remaining investments are worth.
Other investments whose current value the teachers' system will not disclose have so far been money-losers. The teachers put
$56 million into investment firm Houlihan, Lokey, Howard & Zukin's Sunrise Investment Partnership in 1998, but had only $5
million to show for it at the end of last year. The system put $180 million into Deutsche European Partners IV in 1999, and was
still $44 million short of showing a profit as of Dec. 31.
The teachers' system also provided estimates of the value of investments held by 25 real estate funds, withholding the
information for certain funds managed by Lazard Freres Real Estate Investors and Whitehall Street Real Estate Funds.
The system says its overall real estate portfolio, which equals around 5 percent of its total assets (not counting real estate
investment trusts, which trade on the stock market), has been more profitable than any other asset class in the last five years,
returning an average of more than 12 percent, and rising to 25 percent in 2004.
Last year, the two systems paid a total of $386 million to more than 300 private firms that manage state investments. Of that
total, $260 million was paid to managers of private equity, venture capital, real estate, hedge funds (at the state employees'
system), and other alternative-investment managers, which accounted for less than one-third of the systems' combined
investments.
Contact staff writer Joseph N. DiStefano at 215-843-4947 or jdistefano@phillynews.com.
Pa. pension data leave questions about returns - Philly.com http://articles.philly.com/2005-10-13/business/25443104_1_pension-syst...
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Steve Lisson, Stephen Lisson, Stephen N. Lisson, Austin Texas
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