Alaska Permanent Fund has heavily invested in private-equity funds in recent years and has done well with them in the past.
But a Wall Street Journal story on private equity, sometimes called leveraged buy-out funding, prominently features the Alaska Permanent Fund, Alaska’s piggy bank.
It’s not just the Permanent Fund Corp. The troubles with private equity investments are mainly a problem for institutional investors like CALpers (California pension plan) and Harvard’s pension fund.
“Retirement funds are seeking cash while money is languishing in zombie investments,” the subheadline on the story explains.
Private equity is for the “Big Boys” of Wall Street. Typically, an investor would need to have $20 million to spend before a private equity manager would take his call. The Permanent Fund is in this class of investor; when a Permanent Fund investment manager calls, those calls get taken.
But private equity doesn’t have all the protections from the Securities and Exchange Commission afforded investors in publicly traded equities. For institutional investors, private equity has been displacing publicly traded stocks for some time, all at prices negotiated by the institutions. If they want to get out early or if the private equity investment is not panning out as promised, these assets are hard to get rid of, because they are not tradable.
“To keep benefit checks coming on time, those managers are unloading investments on the cheap or turning to borrowing—costly measures that eat into returns,” the Wall Street Journal said in its eye-opening report, revealing that California’s worker pension will “be paying more money into its private-equity portfolio than it receives from those investments for eight years in a row.”
“You’ve got a lot more money out and going out than is coming back, and I think that’s causing a lot of angst,” Allen Waldrop, the Alaska Permanent Fund Corp. private-equity director, told reporter Heather Gillers of the Journal.
The Permanent Fund Corp. has received cash from private-equity managers making payouts that come not from investment gains but from loans the managers have taken out to appease cash-starved pensions and other investors like APFC, Gillers wrote.
“That is frustrating for the investment chief, Marcus Frampton. He estimated that his fund, which invests mineral revenue and other state money, could borrow on its own at lower cost. So far, this practice doesn’t appear to be widespread,” Gillers continued.
The $80 billion Alaska fund has been getting more cash from its private-equity program than it has put in. But it still missed out on around half a percent worth of stock gains—or about $40 million—over the past year after private equity tied up more cash than expected, causing the fund to run a smaller than planned stock portfolio, Frampton told the fund’s board last month, as reported by Gillers.
“Board members decided to reduce real-estate and cash holdings instead. They also voted to scrap a goal set a year ago to reduce the share of assets in private equity,” Gillers explained, describing how pension funds are now selling private-equity fund stakes secondhand and often taking a financial hit in the process.
“Secondary-market buyers last year paid an average of 85% of the value the assets were assigned three to six months before the sale, according to Jefferies Financial Group. Secondhand sales by private-equity investors increased 7% to $60 billion last year,” she wrote.
Having to sell at a 15% loss to meet liquidity needs eats into yield.
As a result, some pension funds are now borrowing to access cash. Both of the major California pension plans — Calpers and the $333 billion pension serving California teachers — have are now taking out loans equivalent to 5% and 10% of fund holdings, respectively.
The Wall Street Journal story is behind a paywall at this link.
The push by some to get the Alaska Permanent Fund to have greater exposure to private equity made the news lately, with one board member being accused of trying to steer investments toward this riskier and more opaque class of investments, as well as to particular contracted managers.
One example of a the unregulated private equity investments being riskier than publicly traded stocks is the We Work office sharing company, which was once valued at $50 million before filing for Chapter 11 bankruptcy in November.
Another example of a company that went south over the weekend was a food startup backed by private-equity executives and basketball stars. Roots Food Group Holdings faces fraud allegations and is defending a lawsuit by an investor.
One pundit noted that publicly owned endowments getting into the private equity space can be like vacationers visiting Hawaii for the first time and being pitched to buy a time-share condominium.
Liquidity was not a high priority for Permanent Fund managers during the first few decades of its existence. The Alaska Permanent Fund is certainly now big enough that it could purchase a large suburban shopping mall with no particular target date for a payout, with a goal of selling at a time of high prices.
But recently the Legislature has chosen to fund a major portion of state operations using the Permanent Fund Earnings Reserve.
While high oil prices, in part due to a White House that has purposely diminished U.S. energy independence, have somewhat postponed the tension between funding state operations and paying an annual Permanent Fund dividend, the liquidity of the Earnings Reserve Account and unexpected illiquidity of private equity plays could bring problems to at least two branches of state government, especially if world oil prices drop.
Predicting oil prices is best left to the experts, but those at Citi forecast a big drop in prices for 2025, anticipating a decline to $60 per barrel for Brent crude, which would be a 20% crash compared to current markets.
“The report suggests that while short-term volatility may lead to some upside risks, the long-term trend is bearish,” reported OilPrice.com. “The expected surplus in the global oil market by 2025, despite efforts by OPEC+ to curtail production, is cited as the main reason behind the pessimistic outlook.”
