Alaska Permanent in-state program serving a dual investment purpose

Alaska Permanent Fund Corp.'s recent launch of its in-state investment program touts a mission of generating excellent returns in addition to a broad goal of providing capital in diversified industries.

The structure of the Alaska Investment Program echoes programs launched in Florida and New York well over a decade ago, but while those states' programs targeted high-technology companies, the new program seeks to generate returns in a state that is seeking further diversification in its economy. Unlike states with large populations and mature economies, the $66.3 billion Juneau-based sovereign wealth fund's program is intended in part to stimulate an ecosystem where the oil and gas industry has long dominated.

APFC said its Alaska Investment Program, launched Sept. 20, would commit $100 million each to two managers: Barings, which will focus on infrastructure and private credit in its Alaska Future Fund; and McKinley Capital Management LLC, which will focus on private equity and venture capital through its Nanook Investment Fund. The McKinley fund will make growth-oriented investments in emerging Alaska-based funds, and also provide seed capital to emerging entrepreneurs, including new Alaska-based managers.

The permanent fund's board in September 2018 passed a resolution to increase its allocation to in-state investments to 5% of the total fund by 2023 from 2% in 2020.

The program reflects what the fund believes is an area with a lot of potential, said Steve Moseley, APFC's director of alternative investments, in a telephone interview.

"We have a comparative advantage in this part of the world," Mr. Moseley said. "It's not a giant economy but it's an active economy. It's an area that has great potential, and we have a relative advantage here, derived from greater knowledge and better access."

"We're always looking in all places for attractive investments, and it would be almost irresponsible to overlook opportunities close to home," Mr. Moseley said.

The decision to give the responsibility to external money managers reflects the permanent fund's constraints.

"We're trying to do a lot of things with very few people. That's the way we're organized, and it reflects the constraints that exist across government, now more than ever," Mr. Moseley said.

Mr. Moseley said one expectation of the program is to help raise capital for multiple industries in Alaska while also providing seed capital for new Alaska-based money managers.

Finding managers that would help startup firms raise capital, hire talent and develop back-office support and compliance systems was a key consideration in choosing Barings and McKinley Capital to run the program, he said.

The permanent fund has had a relationship with Anchorage, Alaska-based McKinley Capital Management for 20 years.

Mr. Moseley also added, "Barings manages substantial funds-of-funds business and, more specifically, the team we hired has managed in-state programs for other states like Colorado and California, including some credit-focused vehicles."

"It's worth saying that we think we've identified two groups that have complementary skills and resources," Mr. Moseley said.

"There will inevitably be some overlap in the investments the managers undertake, he added, but hiring "two organizations with complementary skills seemed the best way to maximize the probability that the program is successful."

Robert A. Gillam, CEO and chief investment officer at McKinley Capital Management, said in an interview that his firm's fund will focus on emerging managers as much as it will emerging entrepreneurs. The Nanook Investment Fund is about generating a return, Mr. Gillam said. Other economically targeted investment programs primarily exist to create jobs, he said.

While other state's programs focus on a single industry sector, the Alaska Investment Program's focus is purely growth.

"We're bullish on Alaska," Mr. Gillam said. That being said, he noted: "We're a small economy. We're a long way from anywhere. It's not very easy to get capital unless you're building a house or drilling an oil field." The program will provide the opportunity to raise capital in industries outside the oil and gas and tourism industries for which Alaska is most recognized, he said.

The fund will employ McKinley Capital's historical focus on quantitative growth investing and point it at Alaska. Mr. Gillam pointed to the potential of transportation and logistics as an example of an area of potential growth given the state being equidistant from Tokyo, London and New York.

While in-state investing by public pension funds or sovereign wealth funds is nothing new, the formal structure of customized alternative investment funds of funds is uncommon, sources said.

One high-profile precedent is the Florida State Board of Administration, Tallahassee.

The Florida board, which oversees the investments of the $163.1 billion Florida Retirement System, has overseen its own program targeting high-tech businesses in Florida since 2008, when state lawmakers approved allocating up to 1.5% of FRS assets for in-state investments designed to bolster Florida's economy.

In 2009, the state board hired Hamilton Lane to invest in funds for venture capital, small- to midsize buyouts, mezzanine debt and other investments targeting high-tech businesses in Florida, originally committing $250 million.

J.P. Morgan Asset Management came aboard as a second manager earlier this year.

Ashbel C. "Ash" Williams Jr., SBA's executive director and chief investment officer, who joined the board in 2009, said in a telephone interview that the program has been a "spectacular success."

According to an audit from Florida's office of program policy analysis and government accountability, the Florida Growth Fund I had invested $622 million in 46 technology and growth companies and 33 private equity funds as of June 30, 2018, and had a net internal rate of return of 12.5% from inception to that date.

Florida Growth Fund II, which made its first commitment in December 2014, has made 10 fund commitments and nine direct investments totaling $156 million in capital, with a 15.4% net internal rate of return as of June 30, 2018.

The audit also shows that as of June 30, 2018, companies receiving program investments reported creating 17,174 jobs.

Mr. Williams said the structure of the program, giving discretionary responsibility to external money managers, was critically important when it came to a program focused on economically targeted investments.

"If you're in a government setting, there will inevitably be stakeholders — legislators, governors, etc. — who have an acquaintance who could use a little bit of help from this fund," Mr. Williams said.

After the fund launched, Mr. Williams said, "we would be getting calls like that all the time, and I mean it just never stopped and all kinds of ridiculous ideas, stuff that people pulled out of their attics."

Mr. Williams said there was great reward in being able to refer interested parties to Hamilton Lane as the discretionary manager, and after about two years the calls abated.

J.P. Morgan Asset Management was added as a second discretionary manager to provide further diversification. "The two together I think provide an extraordinarily complementary and powerful partnership," Mr. Williams said. Hamilton Lane and J.P. Morgan invest primarily in funds; direct investments are commonly done through a co-investment structure.

Mr. Williams said the Florida program's structure was inspired in part by the $216.2 billion New York State Common Retirement Fund's In-State Private Equity Investment Program launched in 1999.

That New York program has generated $1.1 billion on the $715 million total in 215 individual investments it had exited by June 30, 2019, said Matthew Sweeney, spokesman for New York state Comptroller Thomas P. DiNapoli, sole trustee of the Albany-based pension fund.

The program had closed 14 of the 51 investment funds, generating a 10% net internal rate of return. When looking at capital from all sources including bank loans about $14.1 billion had been invested in 427 companies, Mr. Sweeney said. Companies receiving capital from the program had added 9,000 jobs since the program began.