State discloses venture results

Treasurer Timothy P. Cahill yesterday released results for the 103 venture capital funds the state pension plan invested in from 1986 through 1998, which ranged from a searing 127 percent annual gain to a dismal 46 percent annual decline.

This is the first time the state has released individual performance figures for VC funds. The vast majority produced annual returns of 10 to 30 percent, although several lost money or produced minimal returns, and five had gains exceeding 50 percent per year.

The $32.5 billion pension fund posted its biggest gain on a stake in Menlo Ventures VII, a Silicon Valley fund that was launched in 1997 and delivered an annualized return of nearly 127 percent. The worst investment was a 1988 bet on Invexco, a Houston oil and gas fund that had a 46 percent loss. The state hasn't invested in oil and gas since.

The pension fund, which today has $1.8 billion invested in venture capital and other private funds, released the data in response to public-records requests by the Globe and other news outlets. State pension fund performance is public, but venture funds typically disclose their returns only to their clients. Cahill has resisted disclosing the venture returns because firms have threatened to ban public pensions from their venture funds for violating the tradition of secrecy in the business. Cahill filed legislation earlier this summer to try to keep certain venture details private.

Governor Mitt Romney vetoed the Cahill measure even though he is a former venture capitalist whose many business colleagues and political supporters favor privacy in venture capital.

Cahill released the data yesterday, a day on which he hosted a national convention of state treasurers. He omitted information on venture funds launched in the past five years and said the pension plan will release data on 1999 funds next year. ''We feel it's the right thing to do. Disclosure is important to us," Cahill said.

He said venture capitalists should be held to similar disclosure standards as other investment firms. But to make sure the state has access to venture capital, he said, the pension fund must avoid presenting data that could be perceived as hurting a venture firm's reputation.

''Because the returns are always negative in the beginning, we feel it makes sense to give it some time before we release those numbers," Cahill said.

Venture funds usually invest their money in private companies over the first three years of the life of the fund. They then reap the gains on those investments, by selling the companies or taking them public, in the following three to seven years. That means funds often show a negative return in the first several years -- a phenomenon venture capitalists say would confuse investors.

The Globe first sought VC performance results about two years ago, when Shannon O'Brien was treasurer. She did not release the data and until yesterday Cahill had declined to as well. His release of the information yesterday was unexpected.

Advocates of greater transparency in venture capital suggest that, with proper benchmarks to use as a measure, funds could be reasonably compared to their peers even when they are young.

David Barry, managing editor of the Private Equity Analyst, a Wellesley trade publication owned by publisher Dow Jones & Co., said: ''It would be good if there were some standardization in this industry, so you really could understand this stuff and put it in perspective." Barry said state officials who try to keep venture data private are acting against the public interest: ''It's one of those issues that will eventually come back to bite them, in this era of openness, to pass legislation to keep this information out of the public eye."

Calculating venture returns is tricky. Many people argue that annual return data are misleading, and that the only true measure of a fund is the final tally of its performance at the end of its life.

Since the state started investing in venture capital in 1986, it has reported an average annual return of 12.7 percent, through March 31 of this year, pension officials said yesterday. That matches the 10-year average return for all private equity funds tracked by Thomson Venture Economics, a New York research firm. Over 20 years, private equity funds have returned 13.6 percent.

The Internet boom of the late 1990s was great for VC funds. But for funds that started investing in 1999 and 2000, just before the tech crash, similar returns could be challenging.

The Google IPO may rescue some major venture funds of that era that were underwater, Barry said, and reset the bar for a generation of funds that have been expected to break even at best.

Beth Healy can be reached at bhealy@globe.com.