In September, the Alaska Permanent Fund Corporation launched a new program targeting investments within the state.
Corporation CEO Angela Rodell introduced the new program to an economic opportunity conference — Accelerate: Alaska — in Anchorage.
The new in-state investment program is part of a larger strategy the corporation’s Board of Trustees set last year that would carve out 5% of the Permanent Fund for in-state investment.
The corporation is putting a fraction of its nearly $64 billion fund — about $200 million in seed money — toward the program. It will be split equally between two fund managers. One that’s local, Anchorage-based McKinley Capital Management, LLC, and one that’s new to the state, Barings, LLC.
“We think this is a way that we will be able to leverage our experience, our relationships both in Alaska and outside of Alaska to really bring that capital, because there are opportunities here in Alaska and they range from everything from new startups, new ideas trying to get that initial seed funding to generational businesses looking at ways to either lever or sell or move out of that space that they were in,” Rodell said during the conference.
Between the two companies, there’s a broad range of opportunities that they’re looking to invest in. Barings’ Managing Director Mina Pacheco Nazemi said they’re also looking for ideas from Alaskans.
“We recognize that there are a lot of folks who’ve been in the state that are locals who have very specific views and a lot of history in the state and may have some great ideas and we want to hear from everyone,” she said.
Barings is a subsidiary of the global investment firm Mass Mutual. The company is calling its $100 million mandate the Alaska Future Fund.
Pacheco Nazemi said this is the first time the company has worked with the Permanent Fund Corporation. The company will focus its investments on real assets — things like natural resources, transportation and infrastructure.
“It could be anything from shipping, aviation, ports, telecom, power. So all of those three sectors and then opportunities within those three sectors would be within our mandate,” she said. Those investments would have to be in businesses or projects that are either based in Alaska, have operations in Alaska or a plan to operate within in Alaska.”
McKinley Capital Management CEO Rob Gillam said his firm is bullish on Alaska and its managers are trying to find ways to make the state’s economy more diverse, which he calls the “holy grail” in the state.
The company has a decades-long relationship with the Permanent Fund Corporation. Gillam said it is eyeing investments in the bright spots of the state’s economy: things like tourism, business opportunities in the Northwest Passage and renewable energy.
“Alaskans are doing cool things,” he said.
While each of the fund managers said there are ample opportunities for investment in Alaska — Rodell, Pacheco Nazemi and Gillam all emphasized the idea that any investments have to meet market-standards for returns. Essentially that means investments won’t happen just because a project is in Alaska; they also have to make money for the Permanent Fund.
“We’re not going to take anything less than those market-rate returns. We’re not talking about a grant program, write offs,” Rodell said during the conference. “We expect everything that gets invested to be fully successful, scaleable and opportunistic for all of us.”
Therein lies one of the potential risks when a state-owned fund puts its money to work close to home. There can be pressure on fund managers to consider other things — like how many jobs an investment may provide to Alaskans. The idea that competing mandates could lead to sub-par returns worries former state legislator Steve Rieger.
He said investing in the state comes with its own unique set of challenges because fund managers will have to choose between making a profit and being seen as good neighbors for Alaskans.
Rieger has a long history with the Permanent Fund. He was hired by the legislature in the early 80s to work on the legislation that established the Permanent Fund Corporation. He went on to serve on its Board of Trustees.
Back then, Rieger said, there was a big fight over how the Permanent Fund should work.
“There were competing models. There was what we called a ‘development bank model,’ which was to use the money to advance infrastructure, or employment or whatever. And then a more standard institutional investment model, and we looked at the success records … and came down squarely on the side of institutional investing and that’s what finally passed into law,” he said.
Over the years since then, Rieger said the Permanent Fund’s track record has proven that the model that it’s following has worked.
“So I worry about the move that it has just announced,” Rieger said. “I think if there is a good solid investment of the quality that the Permanent Fund would invest in, it can and would happen without this set-aside. Instead what this set-aside risks doing is putting a fairly large bull’s-eye on $200 million of the Permanent Fund’s capital.”
Reiger said that pressure is a big part of the reason why they didn’t invest in the state from the beginning. He worries that it’s not a good idea to change that mandate now.
There are some states where in-state investment by a state-owned fund has been successful. One example is the Florida State Retirement System. Florida’s State Board of Administration launched the Florida Growth Fund, a program targeting tech businesses in Florida in 2008 — with investment money from the retirement system.
John Mogg is a senior portfolio manager who helps oversee that fund.
“The program has been very successful,” he said. “The ancillary benefits are that it’s created over 17,000 jobs in the state.”
There were also questions about political pressure and how much capital should be put in at one time when the program was built.
“Our CIO was very thoughtful with respect to this and the structuring,” he said. “He identified early on that there might be political influences. Folks that would come to us with investment ideas that might not necessarily be in the best interests of the trust.”
So the fund hired an independent third party that all investments are sourced and analyzed through. In other words: a firewall.
“That ensures that there’s no outside influence. So if there was an investment that came up through a political channel, they would be directed to this independent third party,” he said.
It’s not clear if the Permanent Fund Corporation has a similar structure in place. The Corporation’s Communications Manager Paulyn Swanson didn’t return multiple phone calls for this story. CEO Angela Rodell didn’t return an email seeking an answer to that question on Tuesday.
News of the new pool of investment money has landed well in other parts of the state.
“It’s exciting,” said Hugh Short, co-founder and CEO of Alaska-based Pt Capital. “They recognize a need to help grow Alaska’s economy, so I’m very supportive of the effort.”
Pt Capital is a financial services company focused on investments in the Arctic. So far, it has invested in projects in Alaska, Iceland and Finland. But, Short said, it has been hard to build a project to pitch to the Permanent Fund Corporation.
“You know it’s been a challenge for us to access investment from the Permanent Fund because they’re so large.”
Now, he said his company is in a position to pitch both of the in-state investment managers.
He said the program could be a much needed boost for Alaska’s economy, but, like Rodell and others, he said fund managers will have to approach projects carefully.
“I think first of all, it’s not a giveaway. This isn’t, let’s go out and do boondoggles,” he said. “I think the Permanent Fund has been very good about putting some strong emphasis on due diligence criteria,” he said. “This is an opportunity for those folks, perhaps like myself, to prove ourselves. We are folks that understand Alaska in ways that a lot of people from the Outside don’t understand. We see opportunities that other people don’t see. Being able to grow that group of entrepreneurs could be a game-changer for Alaska.”