CalPERS On Private Equity Transparency

In their daily email blast the other day, Reuters PEHub referenced a rationale delivered by two CalPERS investment staff members, investment manager John Cole and general counsel Matthew Jacobs, about private equity transparency and what should be disclosed to the public about those asset allocations and investments.

I have made my position clear more than ten years ago and debated venture capital transparency, as a sub-sector of private equity, in a comment section on my blog with Fred Wilson, Managing Director of Union Square Venture and investor in Twitter, Tumblr, Foursquare, Zynga, Kickstarter, and MongoDB.


I debated then with Fred that entrepreneurs deserve venture capitalists competing for fundraising as crucial in establishing the kind of freedom that makes venture investors step up their game. Fred, unsurprisingly, arguing against transparency, not wanting to relinquish the control such a stance permits.

As an entrepreneur, venture partner and four-time CEO turned innovation economist (by fate) with a lot of experience in the birthing, growth, and exit of early-stage technology ventures, let me reiterate my viewpoints on private-equity transparency, which by asset class distribution includes venture capital as well.

Transparency generally revolves around “what is” and “what must be” and in this case crucial to what the role of pension fund like CalPERS could be to move from the “what is” position to the “what must be” and why, in the three chapters following.

What is

The “what is” position referred to above is far from ideal and can easily be identified as destructive measured against the compliance with free-market principles we constitutionally vouch for embracing. For a lack of meaningful transactional transparency removes a proxy of a free-market and thus turns a marketplace into a stale oligarchy we must avoid for the sake of renewal.

You see, today, private equity is allowed to skirt most of the rulings public markets are bound by. In my view, merely because of the laissez-faire interpretation of the meaning of private.

Private equity in its strictest meaning refers to the acquisition of private shares in a company not available to the general public through a stock exchange. Hence, the term private, in essence, refers to a class of shares unavailable to the public. Said interpretation of private literally taken all the way to the bank by investors who prefer to work in the dark to maintain their oligarchic control as the arbitrage of innovation.

Today, entrepreneurs interested in raising capital for their startups have no insight into the reputation or track record of investors waving money in their face, which is the equivalent of trying to date a person where only one person is allowed to ask questions. An absurd predicament that stifles investor competition that violates any free-market market principles.

The lack of transparency is directly leading to unbelievable amounts of sketchy investor collusion amongst overwhelmingly subprime venture investors promoting a private market construct systemically incompatible with finding outliers. Especially dangerous when we discovered from our relationship with institutional investors ten years ago, more than 99.4% of venture capital investors make no consistent monolithic venture style returns for their limited partners.

As displayed in the chart above, institutional investors deploy funds to entrepreneurs using venture capitalists (and private equity firms) as their specialized middle-men. An arbitrage of innovation that offers limited partners no insight in the impending collusion and subpriming of risk, and offers entrepreneurs no impartial insight into the reputation or performance of venture capitalists.

The lack of transparency in venture not just turning venture capitalists subprime but, more importantly, by Einstein’s definition turning the innovation they can detect subprime. For the theory of investment arbitrage determines what innovation can be discovered.

What must be

Transactional transparency is a free-market precept. Not by default what desperados looking to control others want but definitely what the excellence of human renewal requires.

Transparency is a marketplace precept responsible for consistently renewing a marketplace along with its participants. A crucial capability that allows the marketplace to remain a close representation of the moving target of the evolutionary expansion of humanity.

Any opaque marketplace construct will turn stale quickly and will rapidly narrow the standard-deviation of merit beholden to the marketplace. Any opaque marketplace is by design incompatible with serving an innate standard deviation of human merit and limits the mobility and renewal of said merit, and certainly in the case of venture capital, is simply incompatible with finding outliers of innovation.

It is understandable why a CalPERS Investment Officer states “An attempt to take private investing and make it public runs the risk of undercutting its very purpose and taking oxygen away from its ability to compete.”

For CalPERS has been, by its prior fund-of-funds distribution strategy, highly dependent on the very collusion in private equity to deploy me-too kinds of allocations. The problem is that such allocations lead to diminishing returns, for any marketplace in violation of rudimentary free-market principles is bound to turn subprime.

Private investing should refer to the investment in private shares, nothing more, nothing less.

The same rules that apply to public investing should apply to private investing. Not in the least because the transparency derived from compliance with public disclosure prevents private investing from turning subprime. Competition on deals will increase, not decrease, as a result of transparency. Investors will need to work harder to prove their value-add, providing better and differential access to capital for entrepreneurs who determine what humanity can discover.

No longer will a growing chain of greater-fool investors be able to damage the trust of the public with pump-and-dump schemes of valuations not living up to socioeconomic value post IPO. As the onramp of value and the reputation of trust from inception to IPO can then in public transparency be verified from birth, and better public investment decisions can be made based on more realistic valuations.

The lack of transparency in private equity today is precisely responsible for the unaccountable behavior in and mediocre performance of the asset class.


Pension funds, like CalPERS, have an awesome responsibility to serve the public interests of its members and have an obligation to use their private equity asset-class allocation strategy as the guiding theory driving the fractal of human expansion to only select innovation to strengthen the renewal of humanity long-term. And to improve the consistent regeneration of returns, an institutional investor must deploy asset allocation strategies that closely resemble the dynamic expansion of human ingenuity and capacity.

It makes no sense for CalPERS to deploy an asset allocation distribution strategy different from the past, with more mind-numbing compliance to a highly dysfunctional asset allocation of the past. Hence, my suggestion for CalPERS is to wait until the new CIO is in office and then, for the first time, model the asset allocation strategy to the nature of the asset in question by offering members the transparency commensurate with its vision of long-term value creation.

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