A state superior court judge ruled Thursday that the University of California must divulge detailed information about the investments it makes in venture capital funds, a ruling that UC officials said could cost the system's pension and retirement funds hundreds of millions of dollars.

Although the ruling is a victory for those who argue for greater financial transparency at public pension funds, it may have unintended consequences. Chief among them is that venture capital funds, which have provided public pension funds some of their best historic returns, could close their doors to such money.

That will hurt the pension funds' bottom line. Venture funds represent only a small part of the university's total assets of $53 billion, but they have performed markedly better than UC's investments in public companies over the long term.

For the 170,000 people who invest in the UC retirement plan, that could affect how large their nest egg grows.

UC asked for the hearing after Sequoia Capital, one of the oldest and largest Silicon Valley venture capital firms, excluded the university from investing in its latest fund and asked UC to sell its investments made in previous funds. In July, Sequoia did the same thing to the University of Michigan after that school released detailed information on the performance of its Sequoia investments in response to requests made under the Freedom of Information Act.

The decision by Sequoia, and the ruling by state Superior Court Judge James Richman in Alameda, shows how calls for more disclosure have placed managers of large public funds in a nearly impossible position between two opposing camps. On the one hand are pension members and individual investors who, stung by a three-year bear market and corporate accounting scandals, are demanding more details about how their retirement money is invested. On the other are venture capitalists obsessed with maintaining the confidentiality of the companies they invest in.

'DIFFICULT BALANCING ACT'
"It's a very difficult position, a difficult balancing act," said Julie Peterson, a spokeswoman for the University of Michigan. The university is reviewing the legality of Sequoia's move given that all investment agreements Michigan signs allow the school to disclose information as required by law, Peterson said.

Investment agreements between venture capitalists and their so-called limited partners -- mostly big pension and retirement funds -- are subject to strict confidentiality terms. Venture partners argue that providing data on how each individual fund performs, so-called internal rates of return, would expose proprietary information about the value of the companies backed by those funds.

In a letter from Sequoia to UC Treasurer David H. Russ, a copy of which was obtained by The Chronicle, the Menlo Park firm said it was resolute about not being "hounded, badgered and stalked" for confidential information.

Sequoia didn't return phone calls seeking comment. But the managing partner of another prominent Menlo Park firm said venture partners are more concerned about revealing information about their individual companies rather than internal rates of return per se.

"Why would you take the risk (of divulging information about those companies)?" asked the partner, who spoke on condition of anonymity. Sequoia's position represents the view of those top-tier firms that have the power to turn away investors, the partner said. "UC will not be able to invest money in any of the top-tier firms."

$508 MILLION RETURN

A document filed with the court by UC stated that $110 million in investments in partnerships managed by Sequoia returned over $508 million, a more than fourfold return. Those investments first began 22 years earlier, according to the letter sent by Sequoia.

The struggle in California began in April, when the Coalition of University Employees, along with the San Jose Mercury News, sued the University regents to force them to disclose individual rates of return for the private equity funds invested in by the university's endowment and pension funds.

On July 24, Judge Richman ruled against the university, saying that the need for public disclosure outweighed confidentiality concerns. The university had argued that ruling would prompt venture firms to sever their relationship. Late Wednesday, Sequoia did just that.

"This decision is going to cost the university hundreds of millions of dollars" in future returns, said Russ, the UC treasurer.

Yet the attorney for the plaintiffs in the suit said the judge had rejected that argument out of hand, pointing out that Sequoia was only one of more than 90 venture capital firms that the university invested with.

"The public has the right to monitor investments made with their money," said Karl Olson, partner with the San Francisco law firm Levy, Ram & Olson. "I can't imagine a more compelling reason to argue for disclosure."

Although venture firms have historically outperformed the university's overall portfolio, they have lost money during the last three years, prompting calls for greater transparency.

The managers of the UC portfolio "want us to take everything on faith, but these are the geniuses that lost about a billion dollars on Enron and Worldcom, " said Olson.