After decreasing its allocation to private equity in 2023, the Alaska Permanent Fund Corporation is once again rethinking how much of its sizable investment pool it will commit to the asset class.
“In 2012 when I came to the fund, we had invested four percent of our portfolio in private equity,” CIO Marcus Frampton said. “We grew pretty fast up to 19 percent, but last year we reduced our pacing. Our board members wanted to revisit that.”
Last year, APFC’s staff decreased its private asset allocation from 19 percent to 15 percent, hypothesizing that there were better risk-adjusted returns to be had in asset classes like fixed income and hedge funds. Meanwhile, fellow major pension funds, including CalPERS, continued to bolster the assets they were putting to work in the private markets.
As it reconsiders this decision, the APFC Board heard fromAQR, Pathway Capital Management, and Callan last week about why they should — or should not — make a change. Their views went as one may expect: AQR suggested adding hedge funds and inflation-sensitive assets, Pathway highlighted APFC’s private credit and infrastructure approaches, and Callan provided data on what could happen if APFC increases its PE allocation.
A decision has yet to be made. When one has, though, APFC will have the chance to reconsider its investments in other areas, like real estate, hedge funds, and even gold.
APFC’s private equity portfolio is worth $15 billion, and its largest single exposure in net asset value is about $900 million, according to Frampton. But big allocations like that are markers from his predecessor, Jay Willoughby (who is now CIO at OCIO firm TIFF).
For example, under Willoughby’s leadership, APFC put $500 million to work in Dyal’s first GP stakes fund. Frampton reports that the investment has done well for APFC, but that the organization is now reupping at smaller ticket sizes.
These smaller checks are indicative of Frampton’s private equity strategy at APFC. Rather than allocate big pools of capital to large scale private equity funds, his team is hyper-focused on finding outperformers, many of which operate in the middle market. “If you’re only writing $150 million checks, you can’t really be in middle market buyout funds,” Frampton said.
Right now, his team is typically writing $30 million to $40 million checks to private equity funds and committing a total of $1 billion to the asset class annually — a lower figure than some of its peers. “We definitely write a lot of small tickets,” Frampton said. “My guess is we’re more diversified than large state funds and less than university endowments.”
This strategy has also given Frampton’s team the flexibility to get into some incredibly competitive investment funds. The first time they had access to Sequoia’s U.S. Venture Fund, they could only make a less-than $10 million allocation. Most major pension funds would write that opportunity off, claiming that an ultra-diversified pool of private equity and venture funds wouldn’t move the needle on outperformance.
“We said we’d do that,” Frampton said. “We need to shoot for the top.”
Beyond private equity, Frampton and his team are navigating the high interest rate environment — and what it means for their portfolio. Frampton pointed out that APFC can earn 4.5 percent on treasuries, and 5.5 percent on investment grade bonds. The sovereign wealth fund’s return target is the CPI (consumer price index) plus five percent, so with yields in fixed income as high as they are, the investment team is excited about the possibilities of lower risk opportunities. The investment office recently brought its high yield fixed income operations in-house, which lowers the cost of those strategies, too, adding potential for returns.
“I’m really excited about the rate world we’re in now,” Frampton said. “It used to be that we had to rely on stocks and PE to get the returns I’m focused on.”
The federal funds rate also has implications for APFC’s real estate investments. In real estate development assets, in particular, Frampton sees higher potential for returns. “On the development side, there’s just been a lot of capital coming out of that,” he said. “There are some huge developments that need money to come in.”
He described real estate development assets as a “buyer’s market,” with the biggest risk taken being what the developed real estate can actually be leased at. But Frampton and his team control these investments in separately managed accounts, and intend to hold them for the long term, which helps lower some of the risk. “For real estate, we’re not trying to shoot out the lights, we’re trying to have a safe portfolio of high quality properties,” Frampton said.
One quirk of APFC’s portfolio is that it holds a small allocation to gold— and has done so since 2019. The holdings are in different allocations including cash, hedge funds, and tactical opportunities. Because they are concerned about the Federal Reserve’s ability to navigate current economic conditions — and the value of the dollar — APFC sees an attractive hedging opportunity in this part of the market.