Perspectives 2018 North America: Why Alaska has warmed to GP interests

The sovereign wealth fund has committed more than $1.2bn to the strategy of taking stakes in managers over the past three years.

It is safe to say Alaska Permanent Fund Corporation is a fan of private equity.

The $62 billion sovereign wealth fund is a relative newcomer to the asset class, having only invested through two separately managed accounts prior to the appointment of Stephen Moseley as head of private equity in 2014. As of 30 June, its commitments to the asset class stood at more than $8 billion.

It is also one of the largest participants in private equity’s latest trend: funds that take ownership stakes in general partners. Alaska is a major supporter of the two biggest so-called funds of firms that have closed, having agreed a $550 million commitment to the $5.3 billion Dyal Capital Partners III and $500 million to the $3.3 billion Blackstone Strategic Capital Holdings.

It is understood the commitments were accompanied by revenue sharing arrangements with both funds.

“We think this a juicy strategy,” Moseley tells Private Equity International. “The purchase by LPs of GP stakes has been around for a long time, but with the advent of funds targeting this strategy, the institutional floodgates have opened.”

Credit Suisse, AlpInvest Partners and Goldman Sachs Asset Management are among those taking advantage of this influx. Such is its appeal that Dyal has already secured around $1 billion of commitments for its fourth fund, for which it is targeting up to $6 billion, as PEI reported in October.

Acquiring a stake can entitle funds to a share of management fees and carry across all the target GP’s vehicles. It can also provide the target’s founders with much-needed liquidity without having to list.

LPs hoping to pursue this strategy are not constrained to funds of firms. One option is the direct-seed model in which LPs back a first-time manager with a cornerstone or foundation commitment that eliminates the need for fundraising. These deals can can result in a revenue-sharing arrangement of as much as 20 percent with the target.

Alaska has made five such arrangements in the past four years. The fund has also invested approximately $225 million directly into the management companies of GPs.

The Juneau-headquartered investor has been rewarded well for its confidence. As of 30 June, the fund had generated a 37.5 percent one-year net internal rate of return across its direct GP interests and 24.2 percent when combined with commitments to funds targeting a stake strategy, Moseley notes.

“Our intent was to benefit in some part of our portfolio from a buoyant fundraising environment and from general market froth,” Moseley adds. “I guess you could say it was a hedge, since heated fundraising tends otherwise to be dilutive to LP returns.”

And while the fund does not expect to significantly increase its exposure to GP interests at this point in the cycle, interest in the segment is far from slowing down.

“Seed and stake deals can make great sense but the due diligence and execution is complex and labour intensive, so we’re also exploring ways to institutionalise this activity through the formation of a joint venture with two other large LPs,” Moseley says, adding that the parties are aiming to close the deal within the next month.