Rising interest rates and inflation have dented the private equity industry in 2023 after delivering back-to-back record-breaking years in 2021 and 2022.
“What makes the current economic slowdown different from the one brought on by the global financial crisis is the lack of clarity about what’s happening,” Bain & Company wrote in its Private Equity Outlook for 2023.
“There’s no Lehman collapse, no housing meltdown, no sharp falloff in economic activity to signal a definitive sea change. Instead, the global economy is presenting investors with conditions few among them have ever seen before.”
However, Bain suggested that the lack of adequate diversification in the public markets — over the past 25 years, the roster of U.S. public companies shrunk by 33% — means the long-term demand for private capital investments remains healthy.
The Alaska Permanent Fund is a prime example of a prominent institutional investor scaling back its private equity commitments. That could be good news for its public equities portfolio.
Cuts First Surfaced in February
For those unfamiliar with the Alaska Permanent Fund, it is a fund that was created by the residents of Alaska in 1976 to invest the profits from the state’s burgeoning oil revenue.
In 1980, the state created the Alaska Permanent Fund Corporation (AFPC) to manage the fund’s investments. It is a sovereign wealth fund for citizens of the 50th state. and ranks as the 21st-biggest such fund, according to the Sovereign Wealth Fund Institute. At $1.37 trillion in total assets, the Norway Government Pension Fund Global is the world’s biggest.
From the less-than-$1 million in investments in 1980, the fund has amassed $74.2 billion in total investments, as of April 30, 2023. AFPC’s private equity assets were $15.1 billion at the end of April, the second-largest asset class behind preferred and common stock. Its private and public equities account for 56% of its total investments.
After several years of significant growth, APFC planned to allocate $1.5 billion to new private equity commitments in 2023 (June 30, year-end). In 2012, APFC’s private equity assets were just $1.7 billion. The managers have achieved a compound annual growth rate of 23.1% in almost 11 years since.
In its 2022 annual report, the investment manager targeted a 16% allocation for private equity. With the $500 million cut in new private equity commitments in 2023, it’s targeting a 15% allocation by 2025, down from approximately 20% at the end of April.
The now-smaller $1 billion private equity commitment is expected to lead to less influence with the funds it invests in.
“If you’re writing smaller cheques, you’re not offered a LPAC seat,” Chief Investment Officer Marcus Frampton was reported saying, by Top1000Funds.com in February. “But all else being equal, I’d rather have the right portfolio exposures ahead of getting a board seat.”
As a result of these cuts, Alaskans can expect other asset classes, such as Absolute Return and Real Estate, to get increased allocations in 2023 and beyond.
What About Its Public Equities?
As mentioned, its preferred and common stock allocation is the fund’s largest, accounting for $26.6 billion, or 35.8% of its total investments at the end of April.
Retail investors can gain some stock ideas from examining its 13F SEC filings. APFC’s U.S.-listed securities totaled $6.1 billion at the end of March, according to data compiled by Fintel.
Its top three positions by weight are the iShares Gold Trust Micro (US:IAUM) at 9.59%, the iShares Core MSCI EAFE ETF (US:IEFA) at 8.91%, and the iShares Russell 2000 Growth ETF (US:VWO) at 7.23%.
This tells investors that the investment manager believes gold, biotech and small-cap growth stocks are its best ideas in U.S.-listed equities.
Approximately 85% of APFC’s equities portfolio is managed by external, third-party investment managers, who use a bottom-up, fundamentals-based approach to invest in individual companies. The remaining 15% is managed internally, utilizing a top-down macroeconomic view.
U.S. stocks accounted for 38% of the investment manager’s portfolio at the end of 2022; global stocks had a 36% weighting, and international stocks had the remaining 26%.
As of Dec. 31, 2022, APFC had an annualized total return of 8.73%. Through the first six months of fiscal 2023 (July 2022 through December 2022), it returned 0.55%. The S&P 500 index generated a return of 0.39% over the same period.
APFC’s rollback of its private equity allocation to 15% by 2025 is good news for its other asset classes, including public equities.
This article originally appeared on Fintel
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