CPRA Request Dated 02/26/2014 March 19, 2014 Page 2 of 7 declining to release the requested fund documents, each

of which exempt the LPAs from disclosure. 1. The LPAs may be withheld from disclosure under Government Code Section 6254.26(a) because they are alternative investments.

The California legislature recognized the necessity of public pension funds to make alternative investments in order to compete in the marketplace. Copies of the agreements that you have requested are all alternative investments as defined by the code. Your request contends that real estate funds are not considered alternative investments. However the basis of your argument is unfounded. LACERA relies upon the principle of specialized trade terminology for determination of the type of investment. The code you referenced gives examples of alternative investments, but is not exclusionary: Subdivision (c)(1), the term "alternative investment means an investment in a private equity fund, venture fund, hedge fund, or absolute return fund. The LPAs that you have requested are all alternative investments under Government Code, therefore they are exempt from disclosure under the Act: 6254.26. (a) Notwithstanding any provision of this chapter or other law, the following records regarding alternative investments in which public investment funds invest shall not be subject to disclosure pursuant to this chapter, unless the information has already been publicly released by the keeper of the information: (6) Alternative investment agreements and all related documents. Investment industry authorities provide unequivocal support for the conclusion that the term "alternative investment" includes a private equity investment fund that invests in real estaterelated assets. "Some of the more prominent forms of alternative investments include the following: Real estate - equity and mortgage interests in various forms of commercial and residential properties, including office buildings, hotels, storage facilities, shopping malls, and apartments." [Bailey, Phillips, & Richards, A Primer for Investment Trustees, p.64 (Research Foundation of CFA Institute, Charlottesville 2011.)] "The term 'private equity fund' encompasses a wide variety of vehicles that pursue different investment strategies. As discussed in more detail below, there are a few widely known categories of private equity funds-including venture capital funds, buyout funds, mezzanine funds, real estate funds, distressed funds, and funds of funds." [Breslow and Schwartz, Private Equity Funds: Formation and Operation (Practicing Law Institute, New York, New York, 2012), p17]

CPRA Request Dated 02/26/2014 March 19, 2014 Page 3 of 7 Public pensions have a fiduciary duty to invest the assets of these funds with care, skill, prudence, and diligence. This fiduciary duty includes diversifying the investment of assets in a manner so as to minimize the risk of loss and maximize the rate of return. Investment in high performing alternative investments is a component of diversifying the pension assets and maximizing the rate of return. At the same time, a certain narrow class of public investments, alternative investments, involves some information that historically has been kept confidential because confidentiality is essential to their success. The disclosure of certain information pertaining to alternative investments could be harmful to generating sustainable and profitable rates of return for LACERA. LACERA risks being excluded from participation in certain alternative investments if we disclose confidential information. Exclusion from investing LACERAs assets in alternative investments may impose substantial costs on the public and the public employees who are their beneficiaries. Government Code Section 6254.26 was enacted in order to provide public pension funds the opportunity to continue making alternative investments by creating an environment in which third party proprietary information is not open to public scrutiny merely because it's in the possession of a public entity. The LPAs agreement between the managers and LACERA are exempted under the Act for the foregoing reasons. Having to disclose private confidential agreements would put LACERA at a competitive disadvantage as an investor in alternative vehicles. 2. The LPAs may be withheld from disclosure under Government Code Section 6254(k), because the they constitute a trade secret as defined by Civil Code 3436.1(d) and Evidence Code 1060.

Section 6254(k) of the Act exempts from disclosure trade secrets, which are privileged pursuant to Evidence Code Section 1060. Under the Evidence Code section, the owner of a trade secret has a privilege to refuse to disclose the secret, and to prevent another from disclosing it, if the allowance of the privilege will not tend to conceal fraud or otherwise work injustice. As defined in Civil Code Section 3426.1(d), a trade secret means information that (1) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. The LPAs pass both tests identified in Civil Code 3426.1(d) to qualify as a trade secret: (1) The terms contained in the LPAs embody many years of experience by managers in the business of private equity real estate investment. Each manager has developed its LPA at great expense over years of expertise and refinement. Each manager has

CPRA Request Dated 02/26/2014 March 19, 2014 Page 4 of 7 independently developed structures for dealing with the complexities of modem private equity real estate investing, also at great expense to the manager. An LPA has actual or potential economic value, in that it provides the potential investors with a competitive edge. Competitors obtain economic value from access to the investments. Therefore the LPAs have inherent and potential economic value from not being known, as required by the first part of the test. (2) Managers rigorously police the confidentiality of terms governing the investment partnerships they have sponsored. All potential investors must sign a non-disclosure agreement prior to exposure to any offering documents. The agreements also contain confidentiality provisions that prevent disclosure of the contract terms. By definition LPAs are private documents meant only to be distributed to very select members, who are qualified to invest in such vehicles. The managers have made reasonable efforts under the circumstances to maintain secrecy, therefore the exemption meets the second part of the test. Having shown that the LPAs are trade secrets, LACERA must further show that withholding them will not tend to conceal fraud or otherwise work injustice. LACERA prepares and discloses financial reports that include information mandated by Government Code Section 6254.26(b) of its alternative asset investments sufficient to allow the public to remain informed of LACERAs performance in the asset class, and to measure the performance of LACERAs Board of Investments (the LACERA Board) as a fiduciary. Withholding the LPAs from disclosure will not tend to conceal fraud or otherwise work injustice, and thus LACERA has the right to withhold it. 3. The public interest served by not disclosing the LPAs outweighs the public interest served by disclosure; the LPAs meet the balancing test required by Government Code Section 6255.

Section 6255 of the Act allows LACERA to refuse to disclose requested information if on the facts of the particular case the public interest served by not disclosing the record clearly outweighs the public interest served by disclosure of the record. When the public has sufficient information to judge the performance of a public agency, and when disclosure of the underlying information would have a chilling effect on the agencys ability to perform its mandated duties, the Courts have held that the public interest in nondisclosure outweighs the public interest in disclosure. (City of San Jose v. Superior Court (1999) 74 Cal. App. 4th 1008, 1020.) The public has interests served by withholding disclosure of the LPAs that clearly outweigh the interests served by disclosure. The public benefits from LACERA maintaining both a good

CPRA Request Dated 02/26/2014 March 19, 2014 Page 5 of 7 working relationship with investment partners of its alternative asset investments, and a good reputation within the very small alternative asset investment community. Those relations would be severely strained, and its reputation severely damaged, if LACERA disclosed confidential documents it had agreed not to disclose. To maximize its returns, LACERA must have opportunities to invest in a significant number of investments. Having those opportunities depends, in large part, on LACERAs reputation as a partner within the close-knit alternative asset investment community. A good reputation is essential to gaining access to the relationships that have had top-tier performance historically, or are viewed in the investment community to represent the best investment opportunities. Funds with historical top-tier performance or strong investor demand can be very selective in choosing their partners in all economic climates. General partners are selective for good reason: they will be in business with their limited partners for the next ten to twelve years, the typical term. LACERA risks alienating alternative fund managers and, as a result, jeopardizing its access to top-tier investments, if it acquires a reputation as an undesirable limited partner by disclosing proprietary and sensitive third party data. The value of the investment could be lost if the confidential information becomes public. For that reason partners sensitivities to disclosure are magnified when the disclosure concerns a trade secret or confidential or proprietary information, because disclosure could result in a negative economic impact on the investment. LACERA will be left out in the cold by general partners and other limited partners who view LACERA as an unnecessary security risk for the partnership. They will see LACERA as a tool its competitors may use to access otherwise inaccessible trade secrets, or confidential or proprietary information regarding the LPA or its underlying investments. Competitors need only request the desired information from LACERA under the Act. Moreover, disclosure of this type of information may lead to reduced returns for investors in these alternative investment funds. These records contain valuations and financial statements which others interested in acquiring the assets may use to their advantage. This may in turn lead to less favorable sales and exits, thereby harming all investors. In turn, such disclosures will limit the universe of alternative asset investments available to LACERA, and diminish LACERAs ability to invest in the top-tier partnerships for which there is great demand. Those limitations, in turn, will negatively impact LACERAs ability to meet its constitutionally mandated fiduciary duties to diversify and maximize its investment returns, which serves no public interest. LACERA has demonstrated there is a real public benefit associated with keeping offering LPAs confidential. LACERA provides other information regarding its alternative asset portfolio and

CPRA Request Dated 02/26/2014 March 19, 2014 Page 6 of 7 the Boards actions to sufficiently monitor both the program and the Board. The public interest served by disclosing the terms of the LPAs is minimal compared to the chilling effects of disclosure. LACERA has a fiduciary duty not to disclose the contents of the LPAs requested in order to keep its competitive advantage as an investor in alternative investments. 4. The LPAs constitute official information and are exempt by Government Code Section 6254(k) through Evidence Code Section 1040.

Section 6254(k) of the Act exempts from disclosure official information that is privileged under Evidence Code Section 1040. Evidence Code section 1040 defines official information as information acquired in confidence by a public employee in the course of his or her duty and not open, or officially disclosed, to the public prior to the time the claim of privilege is made. The managers have given the LPAs in confidence to LACERA employees in the scope of their duties. LPAs contain confidentiality requirements to prevent disclosure. The LPAs have not been made public or officially disclosed by LACERA. Thus, they satisfy the definition of official information within the meaning of Evidence Code Section 1040. Having shown the LPAs to be official information, LACERA must further demonstrate under Section 1040 that disclosure would be against the public interest because there is a necessity for preserving the confidentiality of the information that outweighs the necessity for disclosure in the interest of justice. The public has an interest in LACERA maximizing investment earnings, because those earnings can impact the size of the County government contribution. The public interest is best served when LACERA is able to gain access to investments that will maximize LACERAs return. As explained in Section 3 above, that access can be jeopardized, particularly with respect to the private equity asset class, if LACERA is not able to maintain both a good working relationship with the general partners of its alternative asset investments, and in the alternative asset investment community. LACERA makes much information regarding its alternative asset investments available to the public, and that information gives the public ample opportunity to adequately evaluate the performance of both the portfolio and the Board without examining the exempt LPA documents. Legitimate public interest purposes are served by keeping the partnership agreements confidential and those interests outweigh whatever benefits would be gained by making them public.

CPRA Request Dated 02/26/2014 March 19, 2014 Page 7 of 7 Conclusion As directed by Article 1, Section 3 of the California State Constitution, LACERA has narrowly construed the application of exemptions to the withholding of any records made under your request. Further, under Government Code Section 6253.1, if you believe we have misconstrued the nature or scope of your request, we offer to assist you in clarifying them. Pursuant to California Government Code Section 6253(d), John Harrington, Staff Counsel, is responsible for the denial of your request under California Government Code Section 6255. If you have any questions regarding this response, please feel free to contact me directly at (626) 564-6000 x4342, or via email at [email protected].

Very truly yours,

John R. Harrington Staff Counsel

cc:

Robert Van Der Volgen, Chief Counsel John McClelland, Principal Investment Officer