Former CIO Jay Willoughby in 2012 spearheaded a direct investment in American Homes 4 Rent, a single-family rental company and homebuilder. APFC was the company's first investor, and the sovereign wealth fund ultimately invested about $700 million in the company, which has since gone public.
It was a very profitable investment, Frampton said, and APFC has gone on to make other smaller direct deals in sectors such as biotechnology and has generally allocated those to a "special opportunities" asset class.
By 2015, APFC had created the private equity and special opportunities asset class, and deals like the American Homes 4 Rent deal would be allocated to special opportunities. A year ago, Frampton took "special opportunities" off the name of the asset class.
"Every private equity guy thinks everything he does is a special opportunity, but everything they're doing is private equity," he said.
So, he re-created the notion of the special opportunity asset class into "tactical opportunities," which APFC's board approved in July.
"I'm interested in dislocations, and I thought the first thing we would do there — so I did this a year ago — I thought we were going to buy oil and gas limited partnerships in a discount," Frampton said. "And it just turned out the opportunities are just not there. I kept hearing, 'Oh, there's people dumping these things,' and there's not really people dumping these things."
"There might have been in 2020 and 2021 for six months or something," Frampton said, "Right now, I don't really have any big investments there, but I'm looking and I think it's smart to kind of be patient and not think everything you look at is a dislocation."
Regarding direct private equity investments, Frampton said the board's approval in November was more of a formalization of a strategic plan to do them. The sovereign wealth fund currently has a team of seven investment professionals concentrated on private equity, and Frampton said they're seeking an additional person.
There will be an initial focus on buyouts of cash flow-positive U.S. businesses, with a target of $50 million to $100 million per deal initially with between 25% and 50% ownership, according to a presentation included with Oct. 30 board meeting materials. The direct investments will provide a net fee savings of $22 million over the first four years, the presentation said.
While emphasizing both direct investments and co-investments, Frampton said APFC will still commit money to buyout funds and venture capital, just less than in the past.
"I think there was tremendous excess that built up in venture and buyouts, and I think the air's coming out the balloon a lot in venture, but not really in buyouts," he said. "Maybe things have corrected slightly, but it's hard to call turning points. I don't think that there's going to be a crash, but I think buyout private equity is a little unattractive where it is right now."
"But we're maintaining our relationships, deploying some money, but not really hitting the gas pedal," he said. "So at the peak, we were deploying up to $2 billion a year into venture and private equity. We're doing $1 billion right now, and then $1 billion last year, and we did $1.5 billion the year before."
Frampton said 2021 will go down in history as the worst vintage year, and the worst of the excess.
"I think it's going to benefit us in the long run," Frampton said, "but it hasn't really shown up in our returns yet, and at the same time, we're getting some nasty marks in our venture portfolio."
Frampton said about one-third of the net asset value of the sovereign wealth fund's private equity portfolio is in venture capital, which Frampton said is a relatively high percentage among U.S. funds of similar sizes and is negatively affecting the whole portfolio's performance.
"I'm concerned about some of our existing exposure and write-down potential," he said, "And then just knowing we have more venture than our peers, I'm being cautious on deployment."
As of Dec. 31, the actual allocation to private equity was 18.6%; the target is 16%.