Alaska Permanent Fund‘s chief investment officer Marcus Frampton has soured on private equity as the system considers reducing its allocation to the asset class next year.
Many pension systems have slowed down their pacing plans but have done so because of overallocations to private equity. However, Alaska’s investment team has sounded alarm bells about high prices and increased competition making the asset class less attractive than in the past.
“I’m as bearish on private equity as I ever have been in my career,” Frampton said at the fund’s board meeting held on 7 December. “We just haven’t seen the correction in private equity like we have in public markets.” Affiliate title Buyouts watched a livestream of the meeting.
Frampton, who previously worked in the private equity sector, criticised prices paid by private equity firms for assets. “It’s stunning to me to see the multiples people are paying for small, private companies,” he said.
Using information from Pathway Capital Management and S&P LCD, Frampton showed how PE multiples – using enterprise value over EBITDA – currently stand at 11.8x and have steadily grown since 2009, when multiples were 8x.
At other systems, investment teams and advisers have advocated for more private equity exposure especially during times of dislocation, when strong assets might be found at cheaper prices. Many have pointed out strong returns from Great Recession-era vintages.
Frampton countered that sentiment saying that times have changed. “There is a lot more institutional capital chasing private equity now. Every state pension fund has really large private equity allocations, which is very different than in 2001 and 2007. It’s possible we could go into a recession and not see the appropriate correction in multiples.”
Frampton also said the recent collapse of cryptocurrency broker FTX was a sign of the times as private equity and venture funds chase the next big thing. Alaska had a $4 million exposure to FTX, Frampton said.
“I don’t think this is specific to managers,” he said. “There are eroded standards across the sector. There’s a tremendous amount of pressure to get money invested, which results in managers accepting investments without the standard governance practices you’d like to see.”
The current policy targets a 17 percent allocation to private equity for the 2023 fiscal year, which will rise 1 percent each of the next two years. In remarks to the board, Frampton presented a “strawman” allocation that would instead reduce the private equity target to 16 percent in the 2024 fiscal year and 15 percent in 2025.
The system will determine new asset allocation targets in the spring.