Permanent Fund Corp. allocates $200M for in-state investments

  • McKinley Capital Management CEO Rob Gillam will have his team begin seeking out prospects for in-state investments after being allocated $100 million from the Alaska Permanent Fund Corp. (Photo/Michael Dinneen/For the Journal)

The Alaska Permanent Fund Corp. is partnering with one of Alaska’s premier investment firms to put some of the capital from its $65 billion namesake fund to work closer to home.

Anchorage-based McKinley Capital Management LLC will manage half of the newly formed $200 million Alaska Investment Program, which will seek in-state investments for the Permanent Fund, according to a Sept. 20 APFC statement.

The Alaska Investment Program is a means of supporting growing businesses in the state but Permanent Fund Corp. CEO Angela Rodell emphasized that any investments made with the $200 million won’t get preferential treatment just because they’re in Alaska.

“From my standpoint, our No. 1 and only goal is really to beat that private equity benchmark, so (the Alaska Investment Program) has to be contributive to the fund value in a positive way,” Rodell said in an interview.

As with most investment funds, the APFC has return benchmarks, or standards, that its managers are expected to meet and ideally exceed. Those benchmarks vary for each type of investment and typically correlate to the amount of risk an investment entails.

The private equity, or capital, investments that will be made with the $200 million demand a higher rate of return than do real estate purchases, for example, because they require accepting more risk of failure.

The APFC uses a private equity benchmark established by the international firm Cambridge and Associates, which set a return goal of 12.7 percent for the just completed 2019 state fiscal year. The Permanent Fund’s roughly $8.7 billion of private equity investments beat that by netting a 19.2 percent return in fiscal 2019, according to the 2019 APFC Annual Report.

Rodell said she is waiting to see what sectors of the economy the investment capital will be deployed into as the APFC Board of Trustees put few sideboards on the program beyond the return objectives and Alaska focus.

“I think we’re all just really curious to see where this money is going to land and be put to work, but our goal is to make money for the (Permanent) Fund,” she said.

The APFC Board of Trustees passed a resolution in September 2018 directing staff to establish the Alaska Investment Program. APFC staff had been working to set up the program in the year since, and Rodell, a former commissioner of the Alaska Department of Revenue, noted that the Alaska program will require a long-term view. She expects it will take upwards of five years just to deploy the $200 million, which says nothing about when those investments will start generating a return.

“We will lose money to begin with; that is normal; that is not uncommon,” said Rodell, adding that private equity investments often follow what is called a “J-curve.”

“You have to spend a lot of money before you start to see that positive cash flow return and return on investment, so the challenge with this is everybody has to be really patient. It’s not going get deployed in six months and its not going to be making money in eight months and I think that will be a challenge for people because we like our instant gratification.”

McKinley Capital CEO Rob Gillam said working with the APFC is nothing new for his company, as McKinley has managed Permanent Fund assets for 22 years. McKinley leaders are excited to invest in the state because they are “bullish on Alaska,” Gillam said.

He stressed that the Permanent Fund trustees’ collective decision to devote $200 million to Alaska is an indicator they believe there’s money to be made in the state, as it could’ve been put towards projects literally anywhere else on the planet.

The $100 million McKinley will manage will be focused on small to midsized investments in the $2 million to $15 million range with high growth potential, according to Gillam.

While no Alaska investments have been made yet, Gillam said he sees them being largely in what he calls “new Alaska,” or sectors such as renewable energy, technology and logistics, to name a few.

“Those are the kinds of companies that generally don’t have access to capital and we’re going to fill that role,” he said. “There’s an enormous amount of opportunities out there.”

Gillam added that McKinley leaders understand the situation a lot of Alaska entrepreneurs looking for funding face because their company — founded in 1990 by Gillam’s late father and Alaska magnate Bob Gillam — didn’t have access to capital either.

“When we founded McKinley Capital 30 years ago we got exactly zero capital support from anyone and fortunately we were able to scrape together a living and build a business. Now we’re a very global business with clients all over the world and investments all over the world from places like Botswana and Nigeria to the New York Stock Exchange,” he said. “It’s wonderful that there is now an opportunity to have capital available to Alaskans that wasn’t available 30 years ago.”

McKinley now manages a roughly $5 billion investment portfolio.

North Carolina-based Barings LLC, a subsidiary of the financial and insurance giant MassMutual, will manage the other $100 million in the Alaska Investment Program in private credit and infrastructure sectors.

In the coming weeks McKinley will put an Alaska Investment Program application portal on its website.

When the money is eventually invested and hopefully starts generating strong returns, Gillam said it will create what he sees as a “virtuous cycle.”

“Oil and gas come out of the ground, a royalty goes into the (Permanent) Fund, they invest it, they generate a return, the return gets, in-part, paid back to Alaskans and now when this royalty gets invested in place like Alaska — a little bit — and a return is generated and money goes back to Alaskans,” he said.

Technology allows McKinley to invest successfully worldwide, but being an Alaska-based firm provides the advantage of knowing what’s going on in the state, and what opportunities arise from that, first.

“There’s a little of an ‘it’s raining out there’ kind of attitude (about the Alaska economy) and we would say that there are as many opportunities in Alaska today as there were a decade ago and we just need to start looking for them,” he said.

“Look at our business. Nobody would’ve thought you could’ve built a Wall Street firm 30 years ago in Anchorage, Alaska, and here we are with offices in New York and Chicago and Abu Dhabi. What business next door to you or down the street or across town or in Fairbanks or in Juneau is being built today where somebody needs growth capital that could be the next McKinley Capital 30 years from now? There’s a lot of them and hardworking people and it’s our job to find them.”

Elwood Brehmer can be reached at [email protected].

Updated: 
10/15/2019 - 11:09am

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