Citing eroding quality, Alaska Permanent staff to recommend cutting PE target

Alaska CIO Marcus Frampton has been an outspoken skeptic on the asset class in recent months, expressing concerns about manager valuations and governance.

Alaska Permanent Fund’s chief investment officer will propose major cuts to its targeted allocations to private equity at its board meeting scheduled for February 15.

While most large institutional investors remain bullish on private equity, Alaska’s CIO Marcus Frampton has stood out for his contrarian views on the asset class. Frampton stated at Alaska’s December meeting that he is as “bearish on private equity as I ever have been in my career.”

In a presentation set for Alaska’s board meeting scheduled for February 15, Frampton will recommend slashing the system’s PE target to 15 percent over two years, from its current target of 17 percent.

More significantly, Frampton’s plan would effectively cut the target by 4 percentage points, since Alaska’s current plan is to increase its target to 18 percent in FY 2024 and 19 percent in FY 2025.

Buyouts reviewed the presentation.

It is not clear if the board will take action on Frampton’s recommended change to the system’s asset allocation strategy.

Frampton’s proposal marks a major reversal from Alaska’s current asset allocation strategy to private equity. The system 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 mirrors remarks he made at recent meetings, stating that elevated private equity valuations have yet to catch up with public markets.

Frampton 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,” in his presentation.

Frampton also expressed concerns with manager due diligence and corporate governance, citing November’s collapse of cryptocurrency broker FTX. Alaska had a $4 million exposure to FTX, Frampton said at a past meeting.

Alaska’s private equity portfolio stood at $15.4 billion at end of 2022, according to February’s board packet.

Private equity managers will also face challenges managing their investments in the current era of rising interest rates and inflationary pressures, Alaska chief risk officer Sebastian Vadakumcherry said in his own presentation prepared for the February 15 meeting.

Vadakumcherry cited statistics from Bain & Company that show declining revenues 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. This shift from conventional PE strategy may prove costly when costs and rates reverse trend and rise,” Vadakumcherry said.

Approximately $6.3 billion of Alaska’s private equity portfolio consists of unrealized gains, Vadakumcherry said in his presentation.

Vadakumcherry said $1.1 billion of these unrealized gains were connected to private equity investments made more than eight years ago. Unrealized gains in newer funds totaled $1.6 billion, according to Vadakumcherry.