Alaska CIO declares he’s ’bearish on private equity’

'There’s a tremendous amount of pressure to get money invested, which results in managers accepting investments without the standard governance practices you’d like to see,' says Alaska Permanent CIO Marcus Frampton.

Alaska Permanent Fund CIO Marcus Frampton has soured on private equity as the system considers reducing its allocation to the asset class next year.

Many pension systems have slowed down their pacing plans but have done so because of overallocations to private equity. However, Alaska’s investment team has sounded alarm bells about high prices and increased competition making the asset class less attractive than in the past.

“I’m as bearish on private equity as I ever have been in my career,” Frampton said at the fund’s board meeting on December 7. “We just haven’t seen the correction in private equity like we have in public markets.”

See related story: Pesky pensions pare PE plans

Alaska, a sovereign wealth fund with about $76 billion in AUM, has a 17 percent target allocation to private equity for the 2023 fiscal year. The target is set to rise 1 percent in each of the next two years.

Frampton presented the board with a “strawman” allocation that would instead reduce the private equity target to 16 percent in the 2024 fiscal year and 15 percent in 2025. Alaska is expected to determine new asset allocation targets in the spring.

Any reduction in the PE allocation would impact venture capital funds as well as those focused on buyouts. Alaska is an active investor in venture funds, which make up the second biggest chunk of its alternatives portfolio at 18 percent, behind private equity, which stands at 59 percent, according to data from PitchBook.

Alaska’s commitments to VC firms this year include a combined $40 million for Battery Ventures XIV and Battery Ventures Select Fund II, a combined $40 million for Lightspeed Venture Partners XIV and Lightspeed Venture Partners Select V, and $25 million for ARCH Venture Fund XII.

Frampton, who previously worked in the private equity sector, criticized prices paid by private equity firms for assets. “It’s stunning to me to see the multiples people are paying for small, private companies,” he said.

Using information from Pathway Capital Management and S&P LCD, Frampton showed PE multiples using enterprise value over EBITDA currently stand at 11.8x and have steadily grown since 2009 when multiples were 8x.

At other systems, investment teams and advisers have advocated for more private equity exposure especially during times of dislocation, when strong assets might be found at cheaper prices. Many have pointed out strong returns from Great Recession-era vintage years.

Frampton countered that sentiment saying that times have changed.

“There is a lot more institutional capital chasing private equity now. Every state pension fund has really large private equity allocations, which is very different than in 2001 and 2007. It’s possible we could go into a recession and not see the appropriate correction in multiples.”

Frampton also said the recent collapse of cryptocurrency broker FTX was a sign of the times as private equity and venture funds chase the next big thing. Alaska had a $4 million exposure to FTX, Frampton said.

“I don’t think this is specific to managers. There are eroded standards across the sector. There’s a tremendous amount of pressure to get money invested, which results in managers accepting investments without the standard governance practices you’d like to see,” Frampton said.