Five Questions with Rob Gillam of McKinley Capital Management

Despite the unprecedented disruption of the coronavirus crisis, Alaska Permanent's in-state investment program is moving forward, and one of the GPs expects there to be good opportunities.

Robert A. Gillam is the chief executive officer and chief investment officer of McKinley Capital Management, an investment firm based in Anchorage, Alaska. Last year, the firm received a $100 million commitment from Alaska Permanent Fund Corporation for an in-state investment vehicle, as Buyouts reported.

Just after that, the coronavirus crisis hit Alaska and decimated the state’s two key industries, oil and tourism. Despite these setbacks, Gillam remains optimistic that the program will achieve its return goals.

Q: How has the coronavirus crisis affected your plans for the in-state investment program?

Obviously, like everyone, we’re concerned about the health and safety of our employees and our clients and our friends and our families. Alaska hasn’t been spared. Obviously, that’s first and foremost. Second, the response to covid, in addition to covid, has created a massive economic challenge up here. The price of oil went negative. That’s obviously hugely detrimental.

We get 1.4 million or 1.5 million tourists that come on a cruise ship. This year was set to be a record breaker and many companies in the tourism and service space actually geared up – borrowed money, expanded, et cetera, expecting a great tourist season which obviously is not going to happen now. So that’s pretty critical.

We have a fund that has not been detrimentally impacted by covid because we were vintage January 2020. We don’t have portfolio companies that are in distress or anything like that. We’ve already had a first closing, so we have capital to deploy. We have deployed a little bit. We have more coming. If you’re an investor of any kind this would be the time. This is a buyer’s market.

Q: How do you plan on going about deploying your capital?

There’s an opportunity to make investment in the recovery of Alaska post-oil and covid-related collapse. The opportunity is really extraordinary for a variety of reasons. Number one is there are some extremely well-run monopoly-duopoly type of businesses in the state that don’t have a lot of access to capital. There’s not many bidders, not many people showing up to provide capital so the opportunity is pretty great. And the companies are pretty great.

So we’re excited about that.

Q: What are the major limitations presented by the coronavirus crisis?

First, it limits the ability of outsiders to travel to Alaska to make investments. So the ability of other players to deploy capital up here is difficult. It has always been limited, but is even more limited now. So that’s number one. Number two, the traditional banking sector is fairly locked up due to covid, actually really due to the hunker-down rules. What that means is you can’t get an appraisal, you can’t do an environmental inspection, you can’t due a physical inspection of assets or locations. Lastly, travel between communities is quite limited in Alaska.

If we were going to make an investment in company X, or some opportunity in Fairbanks, our ability to deploy a team to do the appropriate diligence is somewhat limited. So, I would say that this is a great time for basic diligence, a great time for analysis, but the actual physical last mile of private deals, the papering, the hardcore diligence, things like that, is, at the moment, compromised. Opening up, but compromised.

Q: What kind of investments are you targeting?

One of the challenges for outsiders investing in Alaska is it’s a very narrow market, so there’s not a lot of bifurcation between industries or between types of capital – private equity, growth capital, venture capital. Everything’s kind of lumped together as “I need money.” As a result of that, I would say we’re really Alaska-centric rather than capital structure-centric or industry-centric.

Having said that, there are some areas of interest. Obviously, we’re an oil and gas and tourism state. So there’s clearly some interest in those spaces. We’re a seafood-producing state, so there’s interest in those areas, and we are a physical commodity resource state, so there’s interest in that area. There are some things that are kind of interesting on the positive surrounding covid. For example, there’s a lot of discussion in the media today around localization. There’s a lot of discussion in the media about the exodus from bigger cities into smaller, more rural communities – for obvious reasons, given covid. So I think there are some technology opportunities up here that you might not have seen a few years ago, [such as] the opportunity to write code for Amazon and live in Anchorage or to have a small business that’s cloud-based or AI-based and that just happens to choose to live here. We have a lot of interest in that as a technology-oriented investment firm. We clearly are an example of a company that can do something from a place that you wouldn’t think of. I would say that there are some opportunities in that categorical space – we call it Arctic-related technology.

Q: How confident are you that you will meet your investment goals?

I’ve always thought the return opportunities in Alaska were great, and I’ll use my business as an example. We were started 30 years ago with the idea that you could compete on Wall Street but you could do it from a place that you preferred to live, using the power of technology, and we have certainly done that. And I would say there’s a lot of other opportunities. So, I’m confident we’ll meet our expectations.

You could argue that under the circumstances that have presented themselves it might even be a little bit easier, just because there are more things for sale, more opportunities to provide capital, more opportunities for investment as a result of this crisis. Clearly, there are more things to pay attention to, more risks out there. But, having said that, the kinds of companies and opportunities that have presented themselves in the last couple of months is pretty extraordinary relative to just a few months prior.

This has been edited for length and clarity by Justin Mitchell.