Alaska’s PE head: why we shy away from mega-funds

There is more long-term value in being a substantial investor in a small or medium sized fund, says Alaska Permanent's Stephen Moseley.

It is little wonder that Alaska Permanent Fund Corporation has such a relentless appetite for private equity, given its success in the asset class.

The $64.9 billion sovereign wealth fund generated a record 32.7 percent return on its $7.3 billion portfolio of private equity and special opportunities for the 2018 financial year, surpassing the 18.27 percent recorded by the Cambridge Private Equity benchmark. Traditional private equity returned 27.87 percent for the year, while special opportunities – which comprises directs and co-investments – earned 40.13 percent.

Private Equity International caught up with Stephen Moseley, APFC’s head of PE and special opportunities, to discover what contributed to the fund being voted PEI’s ‘Limited Partner of the Year – Americas’ and how it is weatherproofing the portfolio for a potential downturn.

Stephen Moseley

What’s been the secret to achieving record returns?

We’ve separated ourselves recently from the benchmarks in part because we have a heavy venture and growth orientation in the portfolio, and that’s been increasing over time because the value of those underlying assets has been compounding.

The other major factor is co-investments. That performance is a derivative of the managers we’ve backed, but also the returns from co-investments typically arrive earlier than the returns from a fund commitment because you don’t have the J-curve.

Some good luck and good partners on early co-investments allowed us to avoid what would normally be a few years of depressed returns and come out of the gates with some strength.

What do you look for in a GP?

Recently some of the best returns in the industry have been among smaller, faster-growing firms and strategies. We don’t have a lot of exposure to very large firms; it’s a relatively short list.

From my perspective in Alaska, there is greater long-term value in being a substantial investor in a small or medium sized fund than being a comparatively small investor in a very large fund.

The Permanent Fund is $65 billion, which seems like a giant number to me, but the truth is our commitments, which would typically be $50 million to $75 million, don’t really move the needle in some of the biggest funds at some of the biggest firms.

We’re doing our best to weatherproof the portfolio.

My concern is that if we make a lot of $100 million commitments to $10 billion funds, we’ll effectively be limiting our access and influence. Being a $100 million investor in a $1 billion fund suggests that commitment means a lot to the GP and that’s the basis, potentially, for a relationship with derivative benefits, one of which is co-investments.

We back a great manager just for the returns from the fund but if there’s an opportunity to have a more meaningful relationship, historically that’s translated into better returns and so we’ve oriented our strategy around that. It means we don’t have exposure to some of the largest cap transactions and that could cost us at some point.

How are you preparing for a potential downturn?

We’re doing our best to weatherproof the portfolio.

I’m sensitive to the risks embedded in our portfolio because it is pro-cyclical, so we’ve made an increasing effort in recent years to identify assets that will either perform well through a downturn or will maybe have a negative correlation with economic growth so to that extent we can hedge ourselves.

With co-investments I’ve found it’s a little bit easier to make those judgements because you’re talking about single concentrated investments in a single business that can be diligenced and we have some control over the timing of the deployment.

All of our co-investments are in businesses that we believe either have growth potential that far outweighs the risk of potential damage in a downturn or they have some defensive characteristics that we think will allow us to weather bad times, and there’s been more of an emphasis on the latter recently.

Stephen Moseley joined APFC in 2013, after having restructured, managed and sold Marston-Ross Corporation, a Connecticut-based family investment office. He was president of StepStone Group and co-president of the direct investment division of the firm’s predecessor company, Pacific Corporate Group.