Alaska Permanent Fund to build in-house direct investing squad

Alaska Permanent Fund will look to build a direct investment program as a way to reduce fees and expenses from its private equity portfolio.

Institutional investors have increased their focus on co-investments as a way to reduce the costs of private equity, which can cut into net returns. Alaska, like other large institutions, is taking the extra step of building an in-house direct investing team that will allow it to be more responsive and flexible to opportunities.

The $74.5 billion sovereign wealth fund approved the addition of a direct investment team at its strategic planning meeting held October 30. Buyouts watched a broadcast of the meeting.

According to a presentation detailing the plan, Alaska will create a three-member team focused on direct investments and co-investments under the umbrella of the private equity division.

“Direct investments tend to take months to do. But adding more capacity adds more expertise,” said Allen Waldrop, who heads the system’s private equity division.

According to the presentation, the new direct investment team is expected to cost $1.5 million annually in compensation and related expenses. It’s not clear yet how the team will be staffed.

Even with the added salaries, a direct investment program would have lower expenses than traditional buyouts funds by eliminating management fees and carried interest, the presentation said.

Alaska will look for targets between $50 million and $100 million in size and will invest alongside a sponsor, the presentation said. The fund intends to own between 25 percent and 50 percent of each investment while sharing joint control with its sponsor.

According to the presentation, Alaska will initially focus on buyouts of cashflow positive US businesses and will avoid venture, complex situations and foreign investments.

The direct investment team will identify between 10 and 20 existing and new managers to work with, the presentation said. Alaska may also consider creating joint ventures or similar entities with other institutional investors when making direct investments.

According to Waldrop, Alaska has made direct investments in the past and currently has enough staff to complete one or two deals a year. “We want to build up enough expertise where we are dangerous,” he said.

Alaska also hinted that it may consider the “active” acquisition of a major or minor stake in an existing asset manager.

Doing so would allow Alaska to access professional investors and also gain more expertise about specific industries and deal types based on the manager’s specialty, the presentation said.

The presentation said this differs from GP stakes, which are usually passive investments that hope to generate returns from the success of platform investments.

Waldron said some Canadian pensions have purchased asset managers with specialties like small-sized buyouts. “It’s an interesting approach. It’s another tool in the toolkit,” he said.