One of the US’s biggest sovereign wealth funds is set to end investments in its home state, citing the potential for conflicts of interest and lack of sufficient opportunities.
The US$76.3 billion Alaska Permanent Fund Corporation (APFC) judged that in-state investments were underperforming compared to the rest of its portfolio. As a result, trustees voted to halt investments in the program, with just one trustee - Craig Richards - of the six voting for a pause instead of winding it down. He is the only member of the board who was present when the program was created in 2018.
Trustee Steve Rieger proposed the resolution to wind down the program on the basis that it was too similar to the Alaska Industrial Development and Export Authority, which is widely regarded as under-performing. However, APFC will not be immediately liquidating its in-state assets, although there is consensus that the Alaskan economy is small and that continued investments in the program would have proven difficult as they would have inevitably benefitted trustees’ family members. Alaska’s GDP was estimated at US$63.6 billion in 2022, meaning that APFC’s total AUM is 20% larger than the entire state’s economy.
The sovereign wealth fund directed US$200 million – the equivalent of 0.3% of total assets under management – to be invested in-state. It made a US$100 million commitment to Barings’ Alaska Future Fund which closed in December 2019 and committed US$100 million to McKinley Capital’s Na’ Nuk Fund which closed in February 2020. No other asset managers responded to APFC’s request for information and the board noted that “the opportunity set of suitable private equity opportunities in Alaska that would meet the targeted returns and other requirements of the Program was too limited relative to the amount of capital they were being asked to deploy.”
By end-Q322, the Alaska Future Fund had contributed US$55 million to eight portfolio investments generating a net IRR of 11.6% and net multiple of 1.13x, while the Na’ Nuk Fund contributed US$76 million to 16 portfolio investments, generating a net IRR of -1.6% and net multiple of 0.98x.
APFC has grown increasingly risk averse commitments with private equity investments dropping off markedly, with concern over elevated private equity valuations; it is planning to invest US$1 billion in the asset class this year, around half the level achieved in typical years. Its private equity portfolio has grown from US$1.7 billion in 2012 to about US$15.7 billion in 2022 at an annualized rate of 25%, although US$6.3 billion is in unrealized gains – a sixth of which was in investments in funds made more than eight years ago. APFC’s private equity fund commitments in Q4 2022 ranged between US$8 million and US$50 million. It is likely that the fund will pare back allocations to private equity, which had been targeted to rise from 17% in 2022 to 19% in 2025.
APFC’s CIO Marcus Frampton is seeking to diversify the portfolio with a boost to allocations to absolute return and real estate – in the latter, he believes the fund could achieve a return of 5% above CPI without extra risk. APFC is set to commit around US$1 billion to infrastructure and private credit this year.