Permanent Fund investment plans generate opportunity, concern

  • 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)

Alaska Permanent Fund Corp. leaders see it as a way to better meet the responsibilities lawmakers have laid out for them while also encouraging economic growth in the state.

To many skeptics, it’s the first step towards degrading a $65 billion investment that has become revered worldwide as a sterling model of how governments can turn fleeting riches into continual wealth.

In September, the corporation announced it had selected North Carolina-based Barings LLC and McKinley Capital Management of Anchorage to invest up to $200 million in Alaska-based ventures and projects.

Barings, a subsidiary of financial and insurance giant MassMutual, will focus on Alaska infrastructure and private credit opportunities; McKinley will manage the fund’s private equity investments in the state, according to APFC officials.

A Journal story detailing the Alaska Investment Program drew a significant response from Alaskans fearful the in-state investment initiative would provide special interests access to the state’s giant nest egg. Former state Rep. Ray Metcalfe was one of the concerned individuals that contacted the Journal about that story.

Metcalfe said his apprehension to investing Permanent Fund dollars in Alaska stems from his time in the Legislature. He was the Republican chair of the House State Affairs Committee in 1982 when some of the original Permanent Fund investment guidelines were being debated by lawmakers.

Metcalfe said he and then-state Sen. Arliss Sturgulewski, who led the Senate State Affairs Committee, drafted very similar bills outlining the APFC’s investment procedures for its namesake fund and worked together to get Sturgulewski’s bill passed near the end of the 1982 legislative session. That legislation purposefully omitted any directive to invest the fund in Alaska-based ventures.

“We were being lobbied by the chamber of commerce, (policy nonprofit) Commonwealth North, the banks and the oil companies to take that money and put it into docks, roads and harbors” in the state, Metcalfe said in an interview. “They wanted us to pay for those things out of the Permanent Fund that oil companies effectively would be taxed for additional monies to pay for.”

He said he worries similar lobbying of APFC officials — though not necessarily from the same groups — could push the fund into politically friendly but not financially savvy investments.

Then a Republican and now a Democrat who has also run for U.S. Senate, Metcalfe said when he started drafting the Permanent Fund investment legislation he was inclined to favor in-state projects but his stance changed after hearing from financial experts who warned against it.

“Think of a 50-gallon bathtub and you’ve got 10,000 gallons of water,” Metcalfe recalled a Harvard finance professor consulting to the Legislature telling him. “If you put that 10,000 gallons in that 50-gallon bathtub it’s going to run over the sides and you’re never going to know where that other 9,000 and some-odd gallons went. You’re economy can only hold so much and there’s only so much money available for viable projects. Let the bankers decide what’s viable.”

He and Sturgulewski successfully pushed to get the Permanent Fund investment legislation passed then because they did not want their opponents on the issue to have a crack at it in the subsequent election cycle, which proved fortuitous, according to Metcalfe.

“Had this been delayed for a year, the Permanent Fund investment strategy would’ve been completely different,” he said.

APFC Board of Trustees chair Craig Richards said the concerns held by Metcalfe and others are understandable and are things most folks in the Alaska investment realm are aware of. The resolution the trustees drafted in September 2018 to start the Alaska Investment Program — also called the Emerging Manager Program — attempted to address those issues.

“We very thoughtfully and purposefully did not say, ‘Alaska Permanent Fund, let’s invest $200 million in the state of Alaska,’” Richards said in an interview. “Instead, we said, ‘let’s hire an external manager, who the Permanent Fund would oversee and that external managers will have the responsibility for investing the money and that external manager’s role to the corporation is to simply — like all other managers in their asset class — is to beat their benchmark.’

“It creates a level of separation between the corporation and the investment decisions.”

Richards, a former state attorney general appointed to the board by former Gov. Bill Walker, stressed that Barings and McKinley will be judged on the returns they generate from the $100 million each will have to invest. Permanent Fund Corp. CEO Angela Rodell similarly said in an interview for the original story that the lone goal for the Alaska investments is to beat the performance benchmark set by the trustees.

“These deals are going to be done exactly the same way as all the others and they’re going to be vetted for the same sort of return and risk expectations,” Richards said.

He added that the APFC investment statute, which has been modified since Metcalfe’s time in the Legislature, now calls for the corporation to make in-state investments when they are worthy. The trustees’ resolution and the Alaska Investment Program are a way for the state-owned corporation to follow the law.

“The law says, all things being equal, we should be investing in Alaska, but I think in practice what was happening was all things being equal the Permanent Fund wasn’t investing in Alaska because there was a concern of investments being politicized,” Richards surmised.

Regarding the statutory language directing in-state Permanent Fund investments, Metcalfe said, “Therein lies your chamber of commerce push.”

Metcalfe said Alaskan entrepreneurs can find other sources of capital for their ventures that don’t invite cronyism, particularly in the global age of finance.

“I just think it’s a bad idea,” he said. “I think it’s a really bad idea and I fully expect them to go out and lose $200 million.”

Beating benchmarks

McKinley Capital CEO Rob Gillam was traveling and couldn’t be reached for additional comment, but he said in a prior interview that he believes there are ample opportunities for mid-sized — about $2 million to $15 million — private equity investments in the state.

McKinley responded to the request for information, or RFI, issued by the APFC early this year for the program and has managed other global equity Permanent Fund investments for 22 years.

According to the latest APFC monthly performance report, McKinley managers were responsible for more than $339 million of fund assets as of Aug. 31.

Those managers have consistently outperformed the global equity benchmark in recent years. Permanent Fund assets managed by McKinley returned an average of 6.36 percent over the past five years, compared to the global equity benchmark of 5.4 percent for the period, according to APFC records.

How McKinley and Barings will be compensated for their work is unclear. While it is a state-owned entity, the APFC’s enabling laws and regulations allow it to keep its business contracts confidential, as is the case with other similar state corporations.

Richards also noted that the $200 million allocated to the program, while an immense sum in nearly every other realm, amounts to just barely 0.3 percent of the total $65.3 billion Permanent Fund.

“Either as a percentage of the asset class or a percentage of the fund, it’s a toe in the water sort of allocation that was meant to sort of get the system up and going. If it has success in five to six years maybe the allocation increases and if not maybe it gets shut down,” he said.

Elwood Brehmer can be reached at [email protected].

10/16/2019 - 10:00am