The Alaska investment program is not a “mistake”
“Here we go again.” Ronald Reagan’s quip to Jimmy Carter came to mind when I read the erroneous DNA editorial stating that the Alaskan investment program of the Alaska Permanent Fund Corp. was a “mistake”.
Set up with little fanfare in 2018, the state investment program has received increasingly negative media coverage in recent months. The controversy appeared to start in December, when Dermot Cole wrote a series of blog posts criticizing APFC for failing to disclose details of individual investments made by the program’s external fund managers. It grew when Frank Murkowski used these pages to question whether the program, which represents less than 0.25% of the Permanent Fund’s holdings, puts FPAC “in jeopardy.” Even the unprecedented information dissemination on the program last month hardly satisfied its detractors; armed with details, they have become parlor investors.
ADN had the opportunity to lay out the facts, provide context and help readers better understand the issues. Instead, we were treated to a confusing 3,500-word article and editorial that added fuel to the proverbial fire. As a result, calls to end the program prematurely have spread unchecked through cafes, online comment sections, Capitol Building hallways, and similar spaces known for their occupants’ less-than-faithful dealings with the truth. .
For those wishing to understand Alaska’s investment program, it is worth going back to its origin. In 2018, APFC launched the program to comply with the spirit and letter of a state law that directs the fund to prefer a public investment over a non-state investment if both offer a rate of return similar risk-adjusted. Prior to the program, APFC staff said there was a lack of time and resources to consider opportunities in the state, especially alternative assets like venture capital, private equity and infrastructure.
To correct this, APFC has allocated $200 million to the program through its existing private equity and special opportunities asset class. He split the money equally between two funds managed by private external managers: the Na’-Nuk Investment Fund, managed by Anchorage-based McKinley Management, which focuses on venture capital and private equity, and the Alaska Future Fund, managed by Charlotte Barings, which focuses on infrastructure and private debt. Like all private equity funds, external managers retain control of investment decisions and day-to-day operations, while APFC staff provide oversight.
The fact that the program is similar to APFC’s other private investments hasn’t stopped critics from attacking it as an aberration. They made three arguments. First, they argue that the program sacrifices returns. Second, by presenting it as an economic development program, they say these goals are best left to public agencies, such as AIDEA. And third, they characterize APFC’s privacy protections as suspect, even harmful, and thus claim that the program is vulnerable to undisclosed conflicts of interest, if not outright corruption.
The claim that APFC sacrifices potential investment returns is easily refuted by a glance at its program guidelines. As APFC makes clear in multiple documents, “the in-state program is part of APFC’s existing asset allocation in the area of private equity and special opportunities and is valued using the same financial return objectives than all other investments in this asset class”.
To be specific, APFC targets an internal rate of return of 15% to 25% for investments in its private equity allocation. To ensure that individual funds are judged fairly, FPAC benchmarks revert to the Cambridge PE index, an industry standard, based on the year each fund was raised, its “vintage”. The Na’-Nuk Fund was raised in 2020, while the Alaska Future Fund was raised in 2019, meaning they should be valued against funds from the same vintages, not the arbitrary average of 29% over five years cited by ADN and others, reflecting funds raised seven to ten years ago that are partially or fully liquidated.
Critics have also presented the program as an economic development program similar to AIDEA and therefore unnecessarily redundant. Frankly, it’s a category mistake. The Alaska Investment Program is designed to realize capital appreciation on private equity and credit assets. Its leaders must meet or exceed performance criteria, regardless of the economic benefits of a single transaction. Such work is starkly different from the work of public agencies like AIDEA, which focus on promoting development by granting loans or providing export assistance.
Finally, much has been said about the APFC’s confidentiality policy, which obliges it to protect files containing proprietary or confidential information relating to private companies. There are good reasons for such a policy. By operating privately, companies are able to compete in the marketplace with less fear of losing competitive advantages or informing rivals of opportunities. This is true both for outside managers like McKinley and Barings, who compete with other private equity firms for deals, as well as the companies they have invested in through their respective funds.
Where investors see a shield, critics see obstacles to public scrutiny. While they are correct in asking what protections the APFC maintains, they should also recognize the ones that already exist. These include existing laws and regulations, the delegation of investment decisions to external managers, and the commitment of APFC’s trustees, staff and external managers to the prudent investor rule, which requires all parties have a fiduciary duty to act only in the best interests of the Permanent Fund. While this does not mean that conflicts of interest are impossible, it does reveal that DNA’s assertion that Alaska is “too small to properly guard against conflicts of interest” is patently false.
Ultimately, APFC’s investment program in Alaska will succeed or fail with returns that won’t be available for six to eight years. If anything in all of this can be called a “mistake”, it’s ADN prematurely declaring the program one.
Taylor Drew Holshouser is Managing Director of the Alaska Ocean Cluster, an ocean and seafood-focused startup accelerator, and a research fellow at the Wilson Center’s Polar Institute, where he supports the Guggenheim Partners-sponsored Arctic Infrastructure Inventory (AII). He is also a former member of the Arctic Economic Council’s Infrastructure and Investment Working Group.
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