By Salar Ghahramani
The Alaska Permanent Fund, a sovereign-wealth fund valued at $77 billion, has recently outlined plans to cut back on its investments in private equity. This asset class has been a major focus for the fund in recent years.
Board's Decision to Cut Private Equity Allocations: During its quarterly meeting held on May 17 and 18, the board of trustees agreed to a revised strategy. For fiscal year 2025, they approved a reduction in target allocation to private equity from the original 19% to 15%. This adjustment represents a notable shift from the five-year asset-allocation plan approved back in May 2020.
Establishment of Tactical Opportunities Portfolio: Further, the board gave a green light to the creation of a tactical opportunities portfolio, setting a target allocation of 2%. The Alaska Permanent Fund aims to invest this portfolio across public and private markets. The strategy will focus on exploring opportunities that may not align with the conventional categories within the portfolio, yet are anticipated to display "equity-like" returns.
Chief Investment Officer's View on Private Equity: The adjustment in policy follows the concerns raised by the fund's Chief Investment Officer, Marcus Frampton. He cautioned against "excesses" within the private-equity market and expressed that the valuations of such assets were currently higher than their justified values. Frampton further stressed on the importance of risk mitigation in order to preserve liquidity for the Alaska Permanent.
First Quarter Portfolio Outflows: The beginning of the year has been marked by notable net outflows from the fund's investment portfolio. This includes nearly $21 million specifically from its private-equity portfolio, resulting in a total net outflow of around $1.2 billion in the first quarter of the year.
Current and Future Commitments to Private Equity: The fund's private-equity assets stood at $15.3 billion as of March 31, accounting for almost 20% of the total fund's portfolio. This surpasses the interim 17% target that was set as part of its five-year plan for the fiscal year ending June 30, 2023. It has actively backed funds managed by seasoned firms such as Advent International, Bain Capital, GTCR, Hellman & Friedman, and Insight Partners.
In the years leading up to 2021, the fund committed an average of $1.8 billion per year to private equity. However, for the fiscal year ending June 30, 2023, commitments are on track to be around $1 billion, with the same amount targeted for the following year.
Debate Among Board Members: The decision to adjust the asset-allocation plan sparked debates among the board members. Some trustees questioned the wisdom of reducing the fund's private-equity investments during a period of economic uncertainty that could bring attractive, lower-valuation opportunities in the market.
Implications: The decision made by the board of trustees of the Alaska Permanent Fund will undeniably have significant implications. With a reduced allocation to private equity, the fund's portfolio will become more diversified, which may potentially increase its resilience against market volatility.
On the other hand, the decision raises questions about missed opportunities in the private equity market. With economic uncertainty prevalent, there might be an influx of high-potential, lower-valuation investment opportunities.
Simultaneously, the creation of the tactical opportunities portfolio brings a new aspect to the fund's investment strategy. This venture may open doors to diverse opportunities in both public and private markets that do not fit into traditional investment categories, thereby offering potentially lucrative "equity-like" returns.
Lastly, it will be interesting to observe how the fund navigates through its private equity commitments in the upcoming years. A reduction in the annual commitment from $1.8 billion to $1 billion, while aiming to maintain strong partnerships with established firms, will be a delicate balance to maintain.
This strategic shift might signal a change in the overall approach towards private equity among similar funds, with many possibly reviewing their investment policies in light of this new direction. However, only time will tell if this decision is a strategic masterstroke or a missed opportunity.
Salar Ghahramani is the founder of Global Policy Advisors.