HEURISTICS: Confidentiality, No One Cares
Are you sharing confidential information? Does anyone care?
This is Heuristics - where assumptions are called out and broken down so that you can invest with greater clarity.
Confidential is used a lot in syndicated investments, but what does it mean for LPs?
This is not legal advice. This is my opinion after examining relevant sources. Reading, understanding, and seeking professional guidance on the contractual terms you may be bound to is your obligation.
What is “Confidential”?
It’s complicated: subscription agreements are unique, and rights and restrictions can vary widely regarding confidentiality obligations for LPs and GPs. However, the terms of confidentiality generally apply to four areas: 1) Pre-Investment; 2) Active Investment; 3) GP Control; and 4) Disputes.
Before we cover each area in detail, keep in mind that:
subscription documents are written by the GP’s legal team to protect the GP’s interests - which are not necessarily the same as the LPs’ interests;
and generally speaking,
confidentiality covenants persist indefinitely. Even after the deal exits, confidentiality endures.
1. Pre-Investment
Before investing, LPs typically sign (or more often check a box) agreeing to basic confidentiality terms restricting the use of the offering materials, such as:
Exclusive Use: materials are provided for the sole purpose of evaluating the deal.
No Sharing: Copying, reproducing, or forwarding documents is prohibited.
Return or Destroy: If you do not invest, you must return or destroy all materials.
So, oops. Sharing a new offering with your friend is not allowed. And you’d better track down and delete all those old pitch decks…
2. Active Investment
As an LP in a deal, you have an obligation to exercise discretion such as:
Non-Disclosure: You cannot share non-public fund details with outsiders, except for professional advisors with a “need to know” such as your CPA or attorney.
No Market Trading of Material Non-Public Information (MNPI): Investor updates often contain MNPI; using this data to trade securities or tip off others is prohibited.
No Publicity: Issuing press releases or speaking to reporting publications about deal terms is not permitted.
OK, so…
Sharing with your attorney and CPA: OK. Everyone else: not OK.
Insider trading: not OK.
Sharing with a publication: not OK.
3. GP Control
The GP also has confidentiality rights and responsibilities such as:
Information Withholding: The Manager can choose to withhold data to protect business interests.
Reduced Reporting: Management may restrict disclosures during sensitive periods (e.g., distressed-asset workouts or to mitigate insider leaks).
Privacy: Contact lists are generally kept confidential to protect investor privacy.
Basically, the GP can choose what is and is not shared “to protect business interests” - which could become a very big umbrella that leaves LPs in the dark.
4. Disputes
These terms outline what happens during a dispute, and may include:
Secrecy in Disputes: The existence, proceedings, and outcomes of any internal arbitration or litigation must remain entirely confidential.
Subpoena Mandate: If subpoenaed, you must immediately notify the Manager before releasing data.
If you get into any sort of dispute, the details of that mess stay private.
In Practice
So, what does all this confidentiality legalese mean in practical terms? Again, I am NOT a lawyer and this is my interpretation and opinion.
No sharing with anyone outside of the deal with a few exceptions for legal or business purposes.
The term never expires. Even if the deal or the GP no longer exists, confidentiality obligations never sunset - they can live on in perpetuity.
But what information is considered confidential?
Are LPs expected to behave like CIA special agents, never uttering a word about anything to anyone?
Clearly, that is not realistic.
Under normal circumstances, an LP has a few practical ways to determine what can never be shared, and what is acceptable to share.
Never Share
Outside of your “need to know” contacts, you should never share:
Raw documents.
Granular-level investment details.
Acceptable to Share
Again, review your documents for specifics but the following generally apply:
Anything already in the public domain (that you didn’t place there).
Acceptable: if Google can find it (such as court filings or information in a publication), you can share it.
Not Acceptable: Documents, quotes, or communications sent to LPs by the GP or other LPs.
Generic opinions about GP performance without deal-level specifics.
Acceptable: “The GP was timely and transparent with communications” (a personal opinion that does not reveal deal specifics).
Not Acceptable: “The GP’s negotiated debt with XYZ Bank was a terrible decision” (an opinion coupled with granular-leve deal specifics).
Not Acceptable: “The GP is a fraudulent crook” (unless the GP actually committed fraud, this is slander and is not acceptable).
Acceptable: “I believe the GP is (un)trustworthy” (an opinion).
Generic non-specific and unidentifiable deal performance.
Acceptable: “my best investment to date was a deal that performed according to plan despite requiring a capital call” (generalized performance that does not identify the deal specifics).
Not Acceptable: “MakeMeRich.com’s Fantasy Lane project located on Sunshire Road in Miami promised to deliver a 29.5% IRR using preferred financing from MoneyBags Bank, but the principal, Mr. BigShot, had a heart attack and the deal went into foreclosure and all capital was lost - here’s the link to the last investor meeting notes” (divulgence of granular-level deal specifics).
Not Acceptable: “GP based in Arizona (whose name rhymes with Fast) did a deal in Dallas for a 368-unit ground-up development that started in April 2022” (divulgence of information that could be triangulated to identify the deal and/or GP mentioned).
Points to Consider
When thinking about confidentiality, an LP should consider:
What are my obligations? Review your documents to fully understand what you have agreed to.
What do I want to share? If you’re discussing general terms with trusted peers, that’s probably OK. If you want to comb over a pitch deck, that could be out of bounds.
Why am I sharing? If you’re looking to slander or otherwise lay waste to a GP as an emotional outlet, it’s probably best to find another way to vent. If you’re looking to share meaningful, objective information that could be OK but is certainly treading the line if it extends beyond opinion.
What will the receiver do with the information? This is potentially the most important point since the intent of confidentiality is to keep important information from falling into the wrong hands. While sharing with one’s investment professionals is permitted, sharing with trusted contacts (while legally not permissible) can be a benign act.
Does anyone care? The prevailing norm is for GPs to ignore and/or generally accept when information is shared for legitimate and benign purposes.
Option C: All of the Above
What if you want Option A: to adhere to your confidentiality agreements AND Option B: to have detailed conversations about a deal?
AI can help provide an Option C: anonymization.
Stay tuned for my AI guide to providing anonymized deal information.
Your Call
We all knowingly or unknowingly violate rules. Like driving 60 in a 55 zone, for example. You may or may not realize you are exceeding the speed limit. You may or may not choose to continue to do so. Maybe you didn’t see the sign. Maybe you’re late for an appointment. However, should you be caught, the law is not on your side. Ignorance or justification does not negate one’s obligations.
Will the law be enforced? Maybe.
Is it enforceable? Yes.
Are you being sensible or reckless? Depends.
Given the long and complex nature of subscription documents, it is unlikely that many LPs are aware of confidentiality other than the prevailing social norm of their environment. And GPs don’t seem to care about enforcing violations.
But choosing to not enforce does not mean unenforceable.