Reader Adrien pointed out an article from the Financial Times from last month, in which the world’s largest fund manager, BlackRock, stood up for the widespread practice in the UK of fund managers insisting that investors, including public pension funds, sign confidentiality agreements. This goes well beyond the objectionable practice in the US, where managers of exotic-seeming strategies like private equity, hedge funds, and infrastructure funds have managed to shroud their activities in secrecy. In the UK, even plain-vanilla fund management strategies, like stock and bond funds, are also subject to this information lockdown.
But as we’ll demonstrate, BlackRock does not walk its talk.
BlackRock has defended the practice of asset managers requiring pension funds to sign non-disclosure agreements despite an outpouring of anger that such arrangements prevent fee transparency.
The world’s largest fund house said it was “neither in the interest of institutional investors nor of investment managers to ban non-disclosure agreements”. Pension schemes argue the arrangements prevent them from comparing fees and securing the best deals for their members.
The reason this has become a bone of contention in the UK is that treating these documents as classified information prevents fee comparisons. An earlier Financial Times story found one pension fund paying over 2.5 times as much in fees as another fund invested in virtually identical products. Since the various UK competition authorities have washed their hands of the matter, the Department for Work and Pensions is looking into a legislative fix.
Mind you, in the US, it would be seen as utterly unreasonable for a fund manager to make this demand for a conventional investment strategy. Why? It’s the result of how the industry evolved in the US. The first large-scale institutional investors were equity mutual funds, which became popular in the 1960s. Those were subject to SEC disclosure, which included disclosure of fees.
The reason that retail funds developed before ones sold to pension funds and endowments was the existence of the “prudent man” rule for fiduciaries. In layperson terms, it obligated trustees to evaluate each investment individually, and also regarded anything other than safe bonds as unduly speculative. It wasn’t until ERISA was passed in 1974, and when the Department of Labor reinterpreted the “prudent man” rule in 1978 to allow trustees to look at risk on a portfolio basis, that equities and other higher-risk investments were deemed to be eligible for investment by pension funds (the intent of the rule liberalization, by the way, was to allow for even riskier investments, namely, in venture capital funds). But US investors are bizarrely blind to how they accept extreme secrecy provisions for some types of investments but would revolt against the same demands for others is a function of whether that investment strategy had much of a following before 1978.
This is hardly the first time that BlackRock has insisted on keeping information about its funds secret, even when it’s the norm in other markets for precisely the same type of information to be public. BlackRock, via New York Fed general counsel Tom Baxter, falsely claimed that transaction-level details of the AIG CDOs in the special purpose vehicle it was managing, Maiden Lane III, needed to be kept secret, otherwise traders would take advantage of BlackRock when it came time to unwind the CDOs. We demonstrated that that claim was bunk, that extensive information, including CUSPIS, was already available through free public sources on 85% of the Maiden Lane CDOs. Traders, who had access to specialized data services, would have even more information. Similarly, when BlackRock was managing the AIG bailout vehicles Maiden Lane II and III, when taxpayer monies were ultimately at risk, its financial disclosure was inadequate.
So why is BlackRock an information hypocrite now? It’s bad enough that the giant fund manager tries to claim that its secrecy requirements are somehow beneficial for its clients. But we’ve now seen that while BlackRock is keen to keep as much of its information under wraps as possible, it hoovers down once-confidential fund management information as soon as it becomes available.
The evidence? We published a new set of ten private equity limited partnership agreements on November 19. BlackRock was hoovering them down less than 12 hours after they went live. We ran the IP addresses that accessed our document trove against Whosis and this was one of the results (we chose one of the later, less prominent limited partnership agreements so as to capture visitors who looked to be systematic about accessing the files):
Now checking IP address: 188.8.131.52
# “n 184.108.40.206”
# The following results may also be obtained via:
NetRange: 220.127.116.11 – 18.104.22.168
Parent: NET199 (NET-199-0-0-0-0)
NetType: Direct Assignment
Organization: BlackRock Financial Management, Inc. (BFML)
OrgName: BlackRock Financial Management, Inc.
Address: 40 East 52nd Street
City: New York
What is curious is that BlackRock already has a large private equity fund of fund business, and through it would have access to plenty of limited partnership agreements. Moreover, there’s no reason to think that there’s any competitive interest, beyond the prurient sort. BlackRock did announce in 2012 that it intended to launch its own private equity funds, but from what we can tell, it has yet to do so. Regardless, as we discussed at length when we published our first batch of limited partnership agreements, despite long-standing general partner claims to the contrary, there simply isn’t anything that one can find in these agreements that amounts to a trade secret. As industry stalwart Dan Primack of Fortune wrote:
Steve Judge, CEO of the Private Equity Growth Capital Council, last month wrote a post for peHUB titled “Confidentiality of limited partnership agreements is paramount.”…
The big problem for Judge and others making similar cases is that a set of limited partnership agreements has leaked out into the public sphere, including from such big-name sponsors as The Blackstone Group, Cerberus, Kohlberg Kravis Roberts & Co., New Mountain Partners and TPG Capital. And they don’t seem to contain the sorts of “secret recipes” that Judge is worried about being revealed.
So BlackRock routinely engages in making eye-popping claims that its confidential demands are really in the best interests of its clients, when it’s obvious that the beneficiary is BlackRock itself. And it also clearly deems non-competitively sensitive information to be potentially valuable, as witness its having accessed our newly-published limited partnership agreements. Since BlackRock likes obtaining other parties’ formerly secret documents, it should have no objection to having similar information of its own made public.