Alaska Permanent Fund’s chief investment officer took a swipe at the VC business in a presentation that recommends the big LP cut its private equity target.
While most large institutional investors remain bullish on PE, Alaska CIO Marcus Frampton has stood out for his contrarian views. He said at Alaska’s December meeting that he is as “bearish on private equity as I ever have been in my career.”
In a presentation for Alaska’s next board meeting on February 15, Frampton recommends slashing the system’s PE target to 15 percent over two years, from its current target of 17 percent.
It is not clear if the board will take action on Frampton’s recommendation.
His proposal marks a major reversal from Alaska’s current asset allocation strategy to private equity. The move would effectively cut the PE target by 4 percentage points, since Alaska currently plans to increase the target to 18 percent in FY 2024 and to 19 percent in FY 2025.
Alaska has been one of the more active limited partners in the market, committing billions of dollars to funds over the past decade and even entering a partnership to seed new managers.
Frampton’s presentation echoes remarks he has made at recent meetings, stating that elevated private equity valuations have yet to catch up with public markets. He specifically noted a “lack of valuation reset to public markets, particularly in the venture capital space where companies are avoiding financing rounds or employing ‘creative financing’ to circumvent markdowns.”
The CIO also expressed concerns with manager due diligence and corporate governance, citing November’s collapse of cryptocurrency broker FTX, which raised about $2 billion from venture capital firms and other investors before it filed for bankruptcy. Alaska had a $4 million exposure to FTX, Frampton said at a past meeting.
Alaska, a sovereign wealth fund with about $78 billion in AUM, 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 PitchBook.
Alaska’s commitments to VC firms in 2022 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, according to Venture Capital Journal research.
In previous years, Alaska committed to venture funds managed by Flagship Pioneering, Index Ventures, Insight Partners, IVP and New Enterprise Associates, among others.
Alaska’s private equity portfolio stood at $15.4 billion at end of 2022, according to February’s board packet.
Alaska chief risk officer Sebastian Vadakumcherry said in his presentation for this week’s board meeting that private equity managers face challenges managing their investments in the current era of rising interest rates and inflationary pressures. He cited statistics from Bain & Company that show declining revenue and margin growth at portfolio companies over the past several years.
“With more than a decade of low rates and rising asset multiples, managers on average have become less adept at improving the performance of their portfolio companies as reflected in the declining revenue and margin growth,” Vadakumcherry said. “This shift from conventional PE strategy may prove costly when costs and rates reverse trend and rise.”
He noted that about $6.3 billion of Alaska’s private equity portfolio consists of unrealized gains. Of the total unrealized gains, $1.1 billion are connected to private equity investments made more than eight years ago, the presentation said. Unrealized gains in newer funds totaled $1.6 billion, it said.