Operational improvement will be key for battling incoming storm clouds, says Alaska

After being overallocated to its private equity asset and special opportunities portfolio for fiscal year 2022, Alaska Permanent Fund will commit less moving into 2023.

Private equity and venture capital need to take a prudent approach to continue their outperformance of traditional assets, Alaska Permanent Fund said in its annual report.

Both asset classes are “positioned to outperform traditional assets in periods of economic growth”, the report said. Markets are facing a downturn, with the threat of recession looming large, meaning “the hands-on management of private equity owners [and] carefully structured transactions with downside protection… will be important to offset reductions in earnings or valuation pressure that will likely be felt in this asset class category”.

Private equity managers have relayed the importance of value creation to Private Equity International in recent months as they face a future with more expensive debt. Last week, both the US Federal Reserve and the Bank of England raised interest rates yet again in an attempt to combat soaring inflation.

Alaska Permanent Fund joins peers tackling the denominator effects as many private equity managers take a conservative, long-term approach to portfolio markdowns after public markets slumped. The LP’s private equity and special opportunities portfolio, which includes strategies such as leveraged buyouts, venture capital and other special situations in private companies, surpassed its long-term asset allocation target of 16 percent to reach 20 percent for its full fiscal year 2022. The portfolio was worth $15.5 billion as of June 30.

Because of this overallocation, combined with “caution around elevated valuations for private equity transactions”, Alaska Permanent has reduced its target commitment pacing down to $1.2 billion for the 2023 fiscal year, down from the $1.6 billion it sought to deploy this fiscal year, the report said.

Across a five-year period, Alaska’s private equity and special opportunities portfolio generated a 25.1 percent annual return versus its 20.7 percent benchmark return. Breaking it down further, private equity, which represented 70 percent of the portfolio in the fiscal year, generated a 28.3 percent annualised return across the five-year period while its special opportunities sub-segment generated a 18.6 percent annualised return.