OPINION: The Alaska Permanent Fund’s in-state investment program needs more transparency

I congratulate the Alaska Permanent Fund Corp.’s board of trustees for adopting Resolution 23-01 at its April 12 meeting to end additional investment into the in-state investment program, in which Barings and McKinley Capital Management have each been given $100 million to place in Alaska investments. The decision appears to have been made in part because of the dismal rate of return received from the in-state investments so far. The decision was also made to see whether the poor performance improves over time.

I fully support the trustees’ decisions not to expand the in-state investment program and not to allocate more capital to it. I would be even more pleased if the trustees made these decisions permanent.

The trustees are certainly right about the poor financial performance of the in-state investments made so far. The APFC reported that Barings’ internal rate of return as of September 2022 was 11.6% and McKinley Capital Management’s internal rate of return was -1.6%. In other words, McKinley may be losing money on $100 million of Permanent Fund money that could have been invested outside Alaska and made money.

A Feb. 24 article from the Alaska Beacon cited an APFC staff assessment that reports that the Alaska Future Fund, managed by Barings, “ranks in the bottom quartile of the vintage year 2019 investments in APFC’s private equities portfolio” and that the Na’Nuk Fund managed by McKinley Capital “ranks in the bottom quartile of vintage year 2020 investments in the same portfolio.”

APFC Chief Investment Officer Marcus Frampton told the Alaska Beacon that if he had another dollar to spend on a private equity investment, “I probably wouldn’t pick (the in-state program) for the next investment dollar.” What is the justification for not following the advice of the APFC’s chief investment officer and terminating the program?

The public also does not know what criteria Barings and McKinley Capital Management are using to make investments. As a matter of policy APFC leaves investment decisions to the private equity managers outside Alaska as a mechanism “to reduce the potential for political influence on investment decisions.” I am concerned about using the same policy for in-state investments because in-state investments are far more prone to politics than those made outside the state.

Former Alaska Permanent Fund Corp. board chair Elmer Rasmussen was absolutely right by insisting from the time the dividend came into existence that Permanent Fund money should not be used for in-state investments for this reason. Sen. Bert Stedman, R-Sitka, is right today in pointing out that the state is so small, and the investment pool is so shallow, that $200 million is a lot of money to invest in Alaska, and that Alaskans need to be assured that the transactions are at arm’s length.

The second reason given for halting the in-state investment program — “to allow investments within the program to mature under the normal course of business to realization or other disposition” — while reasonable on its face, will be hard for the public to measure. Although the APFC is permitted to provide the names of the entities in which Barings and McKinley Capital Management have made investments, it is unable, by the board’s interpretation of AS 37.13.200, to tell the public how much money was invested in each. This prevents the public from knowing how each investment is progressing year over year. Clearly, the Permanent Fund board, while using public funds, has maintained a policy of selective public disclosure.

As a former banker, I am skeptical that the investments made thus far will improve over time. For openers, we have no way of knowing whether the investments made by Barings and McKinley Capital Management were seed money or investments in the capital of entities to which other investors are contributing. In other words, do those who received APFC in-state funds have any “skin in the game?”

Because public funds are being provided to private equity firms to be spent on Alaska projects using criteria of their choosing, because those investments are not doing well compared to the APFC’s other private portfolios, and because of the concerns that have been raised by the trustees and key APFC officers, full transparency is needed, particularly if the investments are not doing well, as appears to be the case here.

In sum, AS 37.13.200 needs to be changed to allow the public to know the investment criteria used by the in-state equity managers, how much money is invested in each fund, who the other investors are, and whether the state’s investments “have a risk level and expected return comparable to alternative investment opportunities.” Only then can Alaskans be assured that the investments are worthwhile, are being spent on projects consistent with Alaskans’ values, and are not investments benefiting the private equity firms that are managing them.

Alaskans are entitled to accountability when their Permanent Fund is put at risk.

Frank Murkowski is a former governor and United States senator from Alaska.

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