February 2022 – Ross Alexander and Logan Rahn, Private Income, Alaska Permanent Fund Corporation

Private Capital Call – a monthly Q&A with industry thought leaders. February 2022 – Ross Alexander and Logan Rahn, Private Income, Alaska Permanent Fund Corporation.

Gentlemen, thank you for making time to join us on Private Capital Call.

1. Private Income – APFC began in 1977 with an initial investment of $734,000. Today the fund has grown to $83 billion in AUM, diversified across many geographies and asset classes, including private income – about 9% of the total. What role does that play in your investment objectives?

The Private Income portfolio consists of a diversified mix of strategies, primarily infrastructure, private credit, and income opportunities. The goal of the Private Income portfolio is to provide the fund with diversification, inflation protection, current income and capital appreciation while achieving a return that is accretive to the overall fund.

The approach to achieving the overarching goal of private income differs by sub-asset class. Our infrastructure portfolio weights more towards inflation protection and capital appreciation as our exposure is primarily to equity risk. Private credit weights more towards current income and inflation protection, as the portfolio is primarily exposed to floating rate lower middle market and middle market corporate debt. Income Opportunities weights towards diversification and current income as it tends to have more esoteric uncorrelated strategies such as real assets, royalties, or insurance-linked strategies. All of the sub-asset classes work together to create an overall exposure that achieves the previously stated goal of Private Income.

2. Inflation Pressure – Energy is obviously a key element of Alaska’s wealth reserves. How do you look at other assets through an inflation lens? Have you had to shift your investment considerations over the past two years?

Although energy was the primary source of capital for many years, its contribution to the State of Alaska’s revenue has waned as energy prices and production have fluctuated. Transfers from the Alaska Permanent Fund now account for greater than 50% of state revenue. APFC views inflation as a key risk to the long-term goal of providing a renewable resource to generations of future Alaskans. Private Income plays a key role in positioning the fund for steady performance in times of inflation. Within Private Income, we have not made any real adjustments to investment considerations due to inflation as inflation-protection is a key part of our investment mandate since APFC launched the private income strategy in 2015.

APFC recently created a dedicated allocation to gold within our Absolute Return portfolio. I won’t give the full pitch on gold in this interview, but will refer readers to our May 2020 board meeting where the allocation was discussed.

3. Whither Rates? – It appears the Fed will finally begin lift-off on rates next month. How do you think about both the short- and longer-term impact of this move? Have you shifted dollars from your fixed income basket to private income in preparation? Would you increase PI allocation?

No near- or medium-term plans to increase our private income allocation. APFC views the increase in rates as a healthy and necessary step to curb what is looking to be not so transitory inflation.

Short term, as the Fed begins to pullback liquidity from the market through the winddown of QE, we are likely to see continued pain in growth company valuations both in public and private markets and are likely to see continued pain in bond markets. Private equity may see a slowdown in realizations as equity markets become less receptive to IPOs, SPACs, etc. Long-term impacts will depend on how sensitive inflation is to future rate hikes, it appears market expectations are that the minimal amount of forecasted rate tightening combined with the end of QE will be enough to curb inflation. If the market’s assumption ends up being correct, we do not see Private Income underperforming our current expectations. If the Fed is forced to return to 1980’s policy, we believe we will see strong relative performance vs our benchmark.

4. Private Equity –You’ve mentioned in the past your concerns about too many PE dollars being raised. Certainly purchase price multiples are at record highs. Are there industry sectors where you see better value than others? Are you similarly worried about public equity valuations?

Since we cover the Private Income portfolio, we tend to look at equity markets through a credit lens. As such, we are cautious in how we evaluate leverage levels, growth prospects, and equity valuations of the companies our dollars are being lent to.

Historically we’ve had limited exposure to cyclical industries in our private credit portfolio and we continue to think this is an appropriate position given current market conditions. With that said, we’re relatively industry agnostic but have a healthy level of skepticism to valuations and forward projections of all types of industries and companies.

Churchill Asset Management
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New York, NY 10152
(212) 478-9200

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