Alaskans need to hear from the Alaska Permanent Fund Corp. on real risks of 'private equity'

While the trustees of the Alaska Permanent Fund Corp. are distracted with the bubble-headed Anchorage office sideshow, they really should be doing more to explain to Alaskans what risks they are taking on our behalf with the investments in the $78 billion account.

I wrote here in June about the new book by veteran reporter Gretchen Morgenson and Joshua Rosner that should be required reading for Alaskans: “These are the Plunderers: How Private Equity Runs—and Wrecks—America.”

Add another book to the reading list, “Plunder: Private Equity’s Plan to Pillage America,” by Brendan Ballou.

One of the private equity companies that figures prominently in both volumes is the Carlyle Group, co-founded by billionaire David Rubenstein, whose daughter Gabrielle Rubenstein was appointed to the Permanent Fund trustees by Gov. Mike Dunleavy a year ago.

The Carlyle Group was managing about $825 million in APFC assets at the time.

The Alaska Permanent Fund and the state’s retirement systems seek to invest about one-sixth of their money in the opaque private equity investments managed by Carlyle and others. But Alaska officials resist explaining the risks and the circumstances in English, preferring to hide behind business jargon.

The Alaska Legislature has long ignored the requirement in state law to produce an annual report evaluating investments in the fund. This legislative neglect poses a great danger.

The Alaska Permanent Fund is the 21st biggest sovereign wealth fund in the world and there is no legislative oversight, no substantial news coverage of its operations and no real public understanding of its investments. What could go wrong?

The second or third largest category of Permanent Fund investment is private equity, about $15 billion, almost all of it invested over the past decade.

The private equity funds use debt to buy private companies and squeeze quick profits out of them before selling.

There are hidden risks of investing in private equity that must be understood, according to research by mathematician Michael Markov, whose work was the focus of this New York Times column Aug. 4 by Jeff Sommer.

Gregg Erickson, the dean of Alaska economists, called Sommer’s column to my attention.

Markov says a big danger with private equity investing is disguised because appraisals are sporadic and delayed, meaning values are subjective and cannot be taken to the bank.

“When you adjust for the stale pricing in private equity funds, the risks are much greater,” Markov told Sommer.

Here is a news story from Willamette Week, prompted by Sommer’s column, that examines the situation in Oregon, coverage that Alaska news organizations should emulate.

The Permanent Fund is cutting back on the rate of private equity investments this year. That pullback comes in part because of the red flag mentioned by Sommer, the inability to get accurate and timely valuations.

It was in 2018 that Private Equity International said the Alaska Permanent Fund was creating a “supercharged private equity portfolio.”

Sommer says that Markov’s research shows that the risks of private equity investment “are at least 20 percent greater than they are reporting, largely because they aren’t taking account of the true risks embedded in private equity.”

“The Securities and Exchange Commission considers private equity too complex and perilous for ordinary people to rely on as core investments, an assessment with which I wholeheartedly agree,” he wrote.

Sommer also writes of the “2 and 20” fee structure that private equity funds collect.

“That’s Wall Street jargon for a ‘2 percent annual management fee and 20 percent performance fee,’ as Gary Gensler, the S.E.C. chairman, explained in 2021. By comparison, broad stock and bond index funds, like those offered by Vanguard, Schwab and Fidelity, charge fees of one-tenth of 1 percent or less to ordinary investors,” Sommer wrote.

“While the steep private equity fees are negotiable for deep-pocketed investors, they are rich enough to generate enormous wealth for fund managers, who are also insulated from fund losses,” Sommer wrote.

The steep fees collected by private equity companies from pension plans and institutions such as the Alaska Permanent Fund and the risk of inaccurate valuations are not mentioned on the permanent fund’s website.

The permanent fund website says there was a 17.6 percent return in FY 22 on the $15.7 billion invested as of June 2022. The “targeted annualized investments returns are 20 percent to 30 percent.”

For the fiscal year that ended Juy 1, 2023, private equity investments were valued at $15.4 billion down 2 percent for the fiscal year.

If there is a case to be made for private equity that goes beyond the “plunder” in the books mentioned above, the Alaska Permanent Fund Corp. should try to make it.

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