Alaska Permanent to cut back commitments due to denominator effect

Alaska Permanent Fund will reduce its commitments by $400m after being overallocated to its private equity and special opportunities portfolio for fiscal 2022.

Alaska Permanent Fund, which this year has invested in new funds from ARCH Venture Partners, Battery Ventures and IVP, has joined peers cutting back on commitments due to the denominator effect.

The LP’s private equity and special opportunities portfolio, which includes strategies such as leveraged buyouts, venture capital and other special situations in private companies, surpassed its long-term asset allocation target of 16 percent to reach 20 percent for its full fiscal year 2022. The portfolio was worth $15.5 billion as of June 30.

Because of this overallocation, combined with “caution around elevated valuations for private equity transactions,” Alaska Permanent has reduced its target commitment pacing down to $1.2 billion for the 2023 fiscal year, down from the $1.6 billion it sought to deploy this fiscal year, it said in its annual report.

Across a five-year period, Alaska’s private equity and special opportunities portfolio generated a 25.1 percent annual return versus its 20.7 percent benchmark return. Breaking it down further, private equity, which represented 70 percent of the portfolio in the fiscal year, generated a 28.3 percent annualized return across the five-year period while its special opportunities sub-segment generated a 18.6 percent annualized return.

Alaska Permanent is an active investor in venture funds. Over the past year, it has committed $20 million each to Battery Ventures XIV and Battery Ventures Select Fund II, $25 million to ARCH Venture Fund XII, and $25 million to Institutional Venture Partners XVII, according to data gathered by Private Equity International and PitchBook.

Alaska Permanent’s annual report said venture capital and private equity need to take a prudent approach to continue their outperformance of traditional assets.

Both asset classes are “positioned to outperform traditional assets in periods of economic growth,” the report said. Markets are facing a downturn, with the threat of recession looming large, meaning “the hands-on management of private equity owners [and] carefully structured transactions with downside protection… will be important to offset reductions in earnings or valuation pressure that will likely be felt in this asset class category.”

Additional reporting by Lawrence Aragon