Alaska to halt in-state PE program, citing reputational risks

'What happens if one of the managers decides to lay off 10% of staff of one of their investments? Can you imagine the headlines and pressure on us to step in and prevent that from happening,' says one board member.

Alaska Permanent Fund will stop making new commitments to its in-state private equity investing program due to concerns about reputational risk and governance, reports affiliate title Buyouts.

Multiple public systems have in-state programs dedicated to backing funds that invest locally, with the goal of boosting local economies. Such programmes have become a popular way for states to use huge pools of capital to try and support hometown businesses.

Through usually externally managed vehicles, states can either invest directly in businesses or through passive LP structures.

Other major systems with in-state programmes include New Mexico State Investment Council, Florida State Board of Administration and New York State Common Retirement Fund.

Alaska’s board voted at its 12 April board meeting to no longer commit to the two funds in the in-state programme, which will effectively wind it down. Buyouts watched a broadcast of the meeting.

Alaska established the in-state investment program in 2018 to help spur private equity and venture capital investment in Alaskan opportunities. The investments had to be consistent with the expected risk and return of traditional private investments, according to the 2018 resolution detailing the program.

Alaska uses Barings and McKinley Capital as its external managers for the in-state programme. Alaska committed $100 million to a fund managed by each manager, according to a presentation detailing the in-state programme at the April meeting.

Barings and McKinley invest in Alaska either directly or with other funds and managers.

To date, Barings has made eight investments while McKinley has made 11, according to a presentation made at the board’s February meeting.

A Barings co-investment in an Alaskan grocery chain drew local criticism, with some pundits claiming Alaska Permanent Fund made a “secret” investment into the business.

“The problems that have arisen already are inevitable. But (the criticisms) are just mild compared to what we could get. What happens if one of the managers decides to lay off 10 percent of its staff from one of their investments? Can you imagine the headlines and pressure on us to step in and prevent that from happening,” said board member Steve Rieger.

Board president Ethan Schutt said Alaska Permanent Fund could face further reputational risk as residents could question why some businesses gain investment dollars and others don’t – an especially acute problem considering Alaska’s small population.

This could lead to people sceptical of the board’s intentions and harm its reputation, according to Schutt.

“If you’re in the business community here, chances are that your siblings are, too,” Schutt said.

The board could also find itself unable to effectively govern the in-state programme if too many trustees recuse themselves from making decisions due to state ethics laws, Schutt added.

Alaska Permanent Fund CIO Marcus Frampton said 60 percent of the investments made by McKinley Capital, based in the state, had a “tenuous” connection to Alaska. The in-state programme allows for investments in companies that are interested in having a presence in Alaska in the future.

“I don’t think any of the managers have violated anything. But some of the companies have a weak link to the state,” Frampton said.

An example of this type of investment comes from McKinley’s seed round investment in Fleetzero, an Alabama-based company focused on building battery-powered electric cargo ships. Fleetzero views Alaska as a possible location for ships travelling between Asia and America’s West Coast to swap batteries.