Our last batch of additions to our private equity limited partnership agreement trove included a limited partnership agreement from Carlyle, specifically Carlyle Partners V, L.P. ("Carlyle V"). We did not call reader attention to the fact that this particular limited partnership agreement was a major focus of an article by the New York Times' Gretchen Morgenson last year on private equity secrecy. She had obtained a copy of Carlyle V from a Teachers' Retirement System of Louisiana under state open records laws, but the document the pension fund delivered was heavily redacted. Morgenson also obtained an unredacted copy and compared the two. Not surprisingly, she found it difficult to justify the redactions:
Comparing the two documents brings into focus what private equity firms are keeping from public view.
Many of the blacked-out sections cover banalities that could hardly be considered trade secrets. The document redacted the dates of the fund's fiscal year (the calendar year starting when the deal closed), when investors must pay the management fee to the fund's operators (each Jan. 1 and July 1), and the name of the fund's counsel (Simpson Thacher & Bartlett).
But other redactions go to the heart of the fund's economics. They include all the fees investors pay to participate in the fund, as well as how much they will receive over all from the investment. The terms of that second provision, known as a clawback, determine how much money investors will get after the fund is wound down…
Also blacked out in the Carlyle V agreement is a section on who will pay legal costs associated with fund operations. First on the hook are companies bought by the fund and held in its portfolio, the unredacted agreement says. That essentially makes investors pay, because money taken from portfolio companies is ultimately extracted from the funds' investors.
But if for some reason those portfolio companies cannot pay, the Carlyle V document says, investors will be asked to cover the remaining expenses. This may require an investor to return money already received — such as excess returns — after a fund has closed, the agreement explains.
The Times published the redacted copy of Carlyle V but not the full version. We've linked both below so you can have fun with them. Notice, to make it easier, our copy already has the redacted sections greyed out, so that once you find a redacted page that interests you, you can see what was omitted without going back and forth.
On a common-sense basis, it's trivial to see how overreaching the information coverup is. Just have a look at page 7 of the PDF (numbered page 3). The items excluded include:
Benefit Plan Partner: Any Limited Partner that is an "employee benefit plan"within the meaning of Section 3(3) of ERISA (whether or not subject to ERISA), a "plan" within the meaning of Section 4975(e)(l) of the Code (whether or not subject to Section 4975 of the Code) or any Limited Partner investing the assets of any such "employee benefit plan" or "plan".
BHC Act: The United States Bank Holding Company Act of 1956, as amended, as the same may be further amended from time to time.
BHC Partner: As defined in Section 5.l(c).
Break-Up Fees: Break-up, topping, termination and other similar fees payable in connection with unconsummated transactions by the Partnership, net of out-of pocket expenses incurred by the General Partner or its Affiliates in connection with the transactions out of which such fees
As you can see, there's nothing sensitive about this material. It's bog standard contract language.
It's also important to understand that the Louisiana public pension fund cooperated in this coverup. It's customary for limited partnership agreements to require the investors (the "limited partners") to resist requests for disclosure. You can see that language in the Carlyle V agreement on page 127 of the PDF, section (d) (numbered page 123). Yet these agreements generally carve out requests under under Freedom of Information laws, and we see that sort of provision here:
…such Limited Partner (x) shall take commercially reasonable steps to oppose and prevent the requested disclosure unless (i) such Limited Partner determines in good faith that there is a reasonable likelihood that such disclosure may be required under applicable law…
In addition, most limited partners act as if they are obligated to keep the contracts under wraps when in fact the agreements generally acknowledge the reverse, that the Freedom of Information laws trump the secrecy pledge. And even though the redactions that the Louisiana pension fund made at the request of Carlyle's counsel look indefensible, it's unusual for the Times to have gotten any document, even a heavily redacted one.
Industry defenders might try arguing that the sections excluded were trade secrets. Good luck with that. Trade secrecy is a high bar, and boilerplate like the definition of the BHC Act, or the wording of the section on Freedom of Information requests don't begin to cut it. Even private equity beat reporters like Dan Primack, who normally have to curry favor with industry sources as a condition of survival, have concluded the trade secret argument is hogwash after having had the opportunity to review some of the limited partnership agreements that we had published. Moreover, mere commercial value of information isn't a sufficient basis for denying an open records request. All service providers have an economic interest keeping in their contract terms from being known by competitors, since those restrictions make it harder for compeetitors to undercut their prices or terms. If the mere possibility of marginally increased competition were sufficient grounds for granting trade secret status, virtually no government contracts would ever be subject to disclosure. In fact, the actual standard of trade secrecy is so difficult to meet that government contracts are universally subject to Freedom of Information requests…except those where the government has a legitimate reason to keep them secret, such as for defense contracts and perversely, private equity contracts, where the industry has used its political clout to keep the public from being able to see them.