OPINION: The Alaska Investment Program isn’t a ‘mistake’

“There you go again.” Ronald Reagan’s quip to Jimmy Carter sprung to mind as I read the ADN’s misguided editorial declaring the Alaska Permanent Fund Corp.’s Alaska Investment Program to be a “mistake.”

Set up to little fanfare in 2018, the in-state investment program has been subject to increasingly negative media coverage in recent months. The controversy seemed to start in December, when Dermot Cole wrote a series of blog posts criticizing APFC for not releasing details about individual investments made by the program’s external fund managers. It grew when Frank Murkowski used these pages to question whether the program, which represents less than 0.25% of the Permanent Fund’s holdings, puts APFC “in peril.” Even the unprecedented release of information about the program last month did little to satisfy its detractors; armed with details, they became armchair investors.

ADN had a chance to lay out the facts, provide context and help readers better understand the issues at stake. Instead, we were treated to a muddled 3,500-word article and an editorial that poured fuel on the proverbial fire. As a result, calls to prematurely end the program have spread unchecked through coffee shops, online comment sections, the halls of the Capitol building, and similar spaces known for their occupants’ less-than-faithful relationships with the truth.

For those interested in understanding the Alaska Investment Program, it is worth revisiting its origin. In 2018, APFC launched the program to comply with the spirit and the letter of a state law that directs the fund to prefer a state-based investment to a non-state investment if both offer a similar risk-adjusted rate of return. Prior to the program, APFC staff said they lacked the time and resources to consider in-state opportunities, particularly alternative assets like venture capital, private equity, and infrastructure.

To correct for this, APFC allocated $200 million to the program through its existing private equity and special opportunities asset class. It divided the money equally between two funds run by private external managers: the Na’-Nuk Investment Fund, run by Anchorage-based McKinley Management, which focuses on venture capital and private equity, and the Alaska Future Fund, run by Charlotte-based Barings, which focuses on infrastructure and private debt. Like all private equity funds, the external managers retain control over investment decisions and day-to-day operations, while APFC staff maintain oversight.

The fact that the program is similar to APFC’s other private investments has not stopped critics from attacking it as an aberration. They have advanced three arguments. First, they contend the program is sacrificing returns. Second, framing it as an economic development scheme, they say such goals are better left to public agencies, such as AIDEA. And third, they characterize APFC’s confidentiality protections as suspect, if not nefarious, and thus claim the program is vulnerable to undisclosed conflicts of interest, if not outright corruption.

The claim that APFC is sacrificing potential investment returns is easily disproved by a glance at its guidelines for the program. As APFC states clearly in multiple documents, “the in-state program is a part of APFC’s existing Private Equity and Special Opportunities asset allocation and is evaluated using the same financial return objectives as all other investments in this asset class.”

To be specific, APFC targets an internal rate of return of 15%-25% for investments in its private equity allocation. To ensure individual funds are judged fairly, APFC benchmarks returns to the Cambridge PE Index, an industry standard, based on the year each fund was raised, its “vintage.” The Na’-Nuk Fund was raised in 2020, while the Alaska Future Fund was raised in 2019, meaning they should be evaluated against funds in the same vintages, not the arbitrary 29% five-year average cited by ADN and others, which reflects funds raised seven to ten years ago that are either partially or fully liquidated.

Critics have also framed the program as an economic development scheme similar to AIDEA and thus unnecessarily redundant. Frankly, this is a category error. The Alaska Investment Program is designed to realize capital gains on private equity and credit assets. Its managers must meet or exceed performance benchmarks regardless of any single deal’s economic benefits. Such work is categorically different from the work of public agencies like AIDEA, which focuses on promoting development by issuing loans or providing export assistance.

Lastly, much has been made of APFC’s confidentiality policy, which obligates it to protect records that contain proprietary or confidential information relating to private companies. There are good reasons for such a policy. By operating privately, companies are able to compete in the marketplace with less fear of losing their competitive advantages or tipping off rivals to opportunities. This is true for both external managers like McKinley and Barings, who compete with other private equity firms for deals, as well as the companies they have invested in through their respective funds.

Where investors see a shield, critics see barriers to public scrutiny. While they are right to ask what protections APFC maintains, they should also recognize the ones that already exist. These include existing statutes and regulations, the delegation of investment decisions to external managers, and the commitment of APFC Trustees, staff, and external managers to the Prudent Investor Rule, which imposes a fiduciary obligation on all parties to act only in the best interests of the Permanent Fund. While that’s not to say conflicts of interests are impossible, it does reveal ADN’s claim that Alaska is “too small to guard well against conflicts of interest” to be patently false.

A final word must be said about the risks of abandoning APFC’s confidentiality policy, as some have urged. Doing so would violate APFC’s existing agreements with external fund managers, who as a rule require strict privacy agreements before they accept outside money. If implemented, APFC would find itself locked out of the best-performing asset class that has powered overall fund returns to their highest levels in decades. I can think of nothing more damaging to the fund.

Ultimately, APFC’s Alaska Investment Program will succeed or fail on the strength of returns that won’t be available for another six to eight years. If anything in all this can be called a “mistake,” it is ADN prematurely declaring the program to be one.

Taylor Drew Holshouser is managing director of the Alaska Ocean Cluster, an oceans and seafood-focused startup accelerator, and a research fellow at the Wilson Center’s Polar Institute, where he supports the Arctic Infrastructure Inventory (AII) sponsored by Guggenheim Partners. He is also a former member of the Arctic Economic Council’s Infrastructure and Investments Working Group.

The views expressed here are the writer’s and are not necessarily endorsed by the Anchorage Daily News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)adn.com. Send submissions shorter than 200 words to letters@adn.com or click here to submit via any web browser. Read our full guidelines for letters and commentaries here.