The Exchanges

Q So what does a portfolio look like today on the private side?

A Well, we have, I don't know how private equity today's 16 with a plan to grow to 19 over the next three years is the fastest growing component of this. Not just because of the expected returns or the actual Returns, not just because it's compounding at a faster rate, but because it's a natural match with the overall duration of the fund. So private equity is in some ways the center of the action, but not enough of the action. It's certainly not the whole game for us. We've got a substantial absolute return portfolio. We've got about two and a half billion in private credit and infrastructure and those neighboring activities, those activities that overlap on the margin with private equity. Are also actively managed internally.

AI assessment note: “private equity today's 16 with a plan to grow to 19”

Q The principal component of what you described then, I imagine, has a very long duration to it. How have you gone about thinking about how to invest that portion of the capital?

A It's true. The duration is theoretically infinite, and our mission, our purpose is to provide for all current and future generations of Alaskans. When the fund was formed, they invested first and only in government bonds. This is the history of a lot of public funds and other large investors in the US. They invested only in government bonds. Then they threw in a little equity. Then they threw in a little international equity. They were active even in the beginning in the mid eighties, active in direct real estate investing. But outside of a few buildings scattered around the lower 48, the capital was all deployed in liquid Equities and liquid bonds. They did begin to move into other alternatives through funds of funds beginning about 15 years ago, but it was a significant Moment, it may not be widely appreciated as this, but I think it was a significant time in the permanent funds history just about nine years ago when they decided to bring a lot of that alternatives activity in house. So that was the time at which we shifted from complete reliance on a small, slightly dysfunctional funds of funds program that covered private credit, hedge funds, and private equity to a Differently managed program that relies a lot more on internal investment decisions.

AI assessment note: “The duration is theoretically infinite, and our mission, our purpose is to provide”

Q What from there goes into your underwriting process on a particular co-investment opportunity?

A Well, so practically, to get away from high-minded philosophy to the nuts and bolts, Because we're human resource constrained, because we're making these tough decisions about how to allocate not only our dollars, but our people, I try to leverage that scarce resource by hiring consultants and advisors, and it is not the most efficient way to do business, but it's the best and only way that we can. We hire different consultants on every transaction. I do this looking at funds, too, and very often we'll learn things that we wouldn't otherwise uncover. But it's fair to say that for a larger than average co-investment, we typically have More than one consultant often will have two or three, an industry expert, a banker, and sometimes a private equity sort of fund consultant, like a pathway or a step stone, and they're hugely helpful to us. Mercer also helps us a lot, and we have this whole cloud configuration of experts that we try to deploy in an efficient way.

AI assessment note: “I try to leverage that scarce resource by hiring consultants and advisors”

Q Once you made the decision to invest in that, do you do anything from a monitoring perspective over those four years or are you fairly passive?

A This is interesting, and one of the reasons it's hard to generalize. That USLBM deal, we were entirely passive. If I added some value there, it was that we agreed offer to underwrite a larger check than we intended to keep. In other words, we sort of facilitated co-invest for other investors. We're not the only one out there who does that, but it is an example. It's one way that an LP can bring value to an equation and to a sponsor. But aside from that, we were completely passive. We got quarterly performance updates. If we didn't have those, I'm not sure it would have changed the outcome in any way, so maybe that's more a charitable act by the sponsor. Kelso has a tendency to work closely with their LPs, and it happens, it happens very naturally. But this is a passive co-investment. We have other investments where we have one or two board seats, or we have an observer seat, or there are difficult decisions to make along the way related to add-ons, for example. Sometimes we'll have a Defined target opportunity for acquisitions for the business, and the management team and the sponsor don't need approval for deals that fall within, that have these defined characteristics. If it's outside of those characteristics, we have a veto provision, so we're involved in the decision making along the way. So there's a spectrum that, where the ends are completely different, but one end of th…

AI assessment note: “That USLBM deal, we were entirely passive.”

Q Well, why don't we start with your background? It's always fun to hear, you know, how someone got into a seat like this.

A I'll give you some highlights and some lowlights. I was born in Boston. I grew up in Princeton, New Jersey. College town. Very academic family. Learned a lot, but probably very little of direct professional relevance. And then I went to, ah, Wesleyan University. It is a sort of quintessentially liberal arts oriented, academically focused, not vocationally focused school. So when I was a senior at age 21, ready to graduate, I had no idea what I wanted to do, what I wanted to be when I grew up. I had no idea, and I had no identifiable, verifiable, sort of marketable skills. So the good news for me is that the investment banks all came to campus to recruit, so I didn't need to have a carefully honed plan or a thoughtful path to something bigger. And better. I just stumbled into those interviews. My first interview, which I remember was with Morgan Stanley, was a complete disaster, which is what you would expect if you, if you knew how little I knew then, it had to be a disaster, but I didn't know what to expect. And I remember the, uh, interviewer asking me why I was interested in investment banking. And I had actually prepared a short response to that, which was kind of the answer to a different question, which is why are you interested in commercial banking? Because as we've since learned, commercial banking is different from investment banking, and you can't guess what investme…

AI assessment note: “I'll give you some highlights and some lowlights. I was born in Boston.”

Q public, and the number of line items on it, the more I scratch my head and say, wait, Why are you doing all this extra activity? Because there is such a large sum of capital to put to work, and as you mentioned, you know, a small team of resources. Where do you see the value that accretes across the fund, both in knowledge and return, from these one-off activities?

A The way that we have framed it intellectually going in is that We'll ultimately earn the highest returns on the most valuable capital we deploy. So to point to an example that's real and live today, there are many, many co-investors out there. I don't know LPs. I don't know many LPs who say they don't have an interest and an appetite for co-investments. And so if, say, Toma Bravo or Vista is syndicating a SaaS deal, Then LPs will just sort of line up for a piece of that. Those are great managers, and there are lots of great deals out there, but blended, cumulatively, hard to earn, very high returns on what's essentially commodity capital. But if we can deliver co-investment capital to a corner of the market that's not getting that attention, that doesn't have the long lines around the corner and the food fight for exposure, I think we can earn more attractive returns. And so a fundless sponsor will have deals that we can't access through certain sponsors. There are market opportunities that sponsors are addressing, but without adequate capital, and if we get behind them, we can share, and the excess rents that can be earned there. So we think that we are paid well for that excess complexity, and I think the theory that supports that is this, relates to this question of how much value are we bringing to the table. And then further, there can be areas of Interest because they're …

AI assessment note: “So we think that we are paid well for that excess complexity”

Q So as you drill down, what does the best managers mean to you?

A There would be a quantitative answer, and I guess in the end, the best manager is the one that most consistently delivers the best The highest risk adjusted returns, but adjusting for risk is more art than science, and we care ultimately about the quality of the overall portfolio, not any specific manager. But having said that, we are looking for a number of things that probably aren't very different from the way another LP would look at it, though we may be weighting these considerations differently. And at the highest level there, these categories would be strategy, We care about the team. We care about the track record, of course. Among those, strategy is the most important. That's where we invest the most time and energy. We're trying to identify managers that are pursuing a sustainable opportunity and pursuing it with a verifiable and identifiable and verifiable competitive advantage. And if we can find a lot of managers with those simple characteristics and they're not perfectly correlated, then we're headed down a road in the right direction.

AI assessment note: “these categories would be strategy, We care about the team. We care about the track record”

Q And Steve, before I turn to a couple of closing questions, There's always a question of when you're in the seat, you're doing senior level things in private equity. You know, how long are your legs to run this race with all the constraints around you and the opportunities you have to pursue now that you've built this program out?

A It's been a great experience working here, and the reasons that I joined still apply. It's still a tremendous platform for, for long-term investing, and I was sure then that we had the tools, that environment, the characteristics of the permanent fund, and my background and the rest of the investment team. That was enough to win, to outperform. I was sure that that was the case, and I think we've been able to demonstrate over the last eight years that that is the case. However, these structural disadvantages Like compensation, like geography, those will ultimately prevail, and I'm not sure I've been successful in convincing others that that's a real problem, because unless you're in the middle of it, kind of hard to appreciate that something That looks like it's working really well is actually broken because that broken element hasn't surfaced yet. It's like a broken jar in the back of the cabinet. You don't know it's a mess until you, until you get back there. I would say that if we're able to deliver those resources, which really just translate into money and focus, a larger team, a well-paid team, if we can't deliver those resources, then we won't win. And I'm not really interested in sticking around if we don't have the tools to win. I know we had it eight years ago. I hope we can, Prevail over time. So we'll either make some changes, or I guess the risk is that the team so…

AI assessment note: “I'm not really interested in sticking around if we don't have the tools to win.”

Q As you look out over the next bunch of years, maybe your next six, seven, eight years at Alaska, how are you trying to innovate on your portfolio? What would you like to do next?

A If I look at our existing portfolio, to start with our existing portfolio, there's clearly room for us to be more thoughtful and analytical about the data that we gather and don't manage very well. I said when I first started, it was easy, and that's true. I could track everything on my, on my laptop. I'd say that today the portfolio probably exceeds my personal ability to manage and monitor it and probably the capabilities of my laptop. So there is data there that's useful. We're not Capturing. We're not applying the embedded value there. We could be more thoughtful about diversification. There are a lot of things we can do with the existing portfolio. There are ways to monetize assets in ways that are obvious and some that are less common. We've sold assets in the secondary market three times in the last eight years because we thought there was a, at least a temporary premium attached to certain assets, and in particular to, to a collection, to a portfolio of assets that could be aggressively levered. Which is kind of taking the opposite side of that leverage, the multiple concern, the multiple trade that we talked about. You know, if you use that leverage, maybe it's a little less scary, and we're effectively using it by exiting in a way that allowed us to capture returns that are amplified by the banks.

AI assessment note: “there's clearly room for us to be more thoughtful and analytical about the data”

Q So for you, what are those simple criteria of the ones that you throw out quickly?

A Over time, I've learned to attach more value to the situational dynamics. This is something that I ignored when I thought the judgment was all about the data that was available to all the company data. I pay more attention to the situational analysis. Why does this sponsor need capital? Why do they need it from us? Why are we getting this call? Is this the, the 50th call, or is it the first call? And that has to be overlaid, of course, against the skill set that that sponsor Brings to the table and needs to be considered in the context of our portfolio. In other words, we have identified gaps in our portfolio that we're trying to fill. There are characteristics that we know even before we know the company. So, you know, for a very long time, we were working hard to generate deal flow in life sciences. I think there are a lot of different ways to win and the distinction I'd point out here Is that understanding the context, understanding fully the incentives of the different players, that turns out to be more determinative than I would have guessed. If you go back and look at these deals, turns out some of those factors matter a lot more than the factors that you would naturally consider, like Purchase price multiples and growth rates and industry factors. That situational assessment turns out to be really important, and I think that's something that develops with time, but only …

AI assessment note: “Why does this sponsor need capital? Why do they need it from us?”

Q Now, how do you view the relative merits of that underlying strategy or market opportunity?

A Well, I like to say that we're not backwards looking. No investor claims that they are, but we do observe and consume a lot of information, and I guess all the studies, including those seemingly impractical liberal arts studies and economics and statistics, have value when we're looking for an opportunity where there's some sustainable growth. Like all private market investors, we should be approaching that question in a way that's different from public market investors, because the duration of our investment Can be expected to be almost needs to be longer. So a strategic opportunity isn't a trading opportunity. A strategic opportunity is something that will persist, hopefully for multiple decades, but that judgment's harder to make, and our thought process will revolve around the typical life of a fund. Which starts with a five-year investment period.

AI assessment note: “A strategic opportunity is something that will persist, hopefully for multiple decades”

Q So I'm curious what that process looks like. It's you, it's probably a small number of people, and there's a big world for deals. How do you narrow the filter?

A Well, it's changed over time. My job has changed over time because the portfolio has changed over time. The right way to build a 12 and a half billion dollar portfolio, in my judgment, does include Co-investments, direct investments, and other activity. It'll be different in the future from what it is today. But that approach also requires that you build the team along the way. So if I contrast my job on my first day of work, it was really easy because there was virtually no portfolio. And so the first direct investment we made, the first secondary purchase we made, and the first fund commitments we made got a lot of attention. And I could track these on my laptop without much trouble. The cumulative, I don't want to call it a burden because it's just the natural and embedded part of the overall ecosystem, but for lack of a better word, the burden connected with all those investments is cumulative. It grows over time, and if we take a board seat on an operating company, a board observer seat, and we are a large investor in a lot of funds, so we've got some LPAC Access and responsibility and simply through natural growth and the number of line items and an overall value complexity grows quickly. So the dollars have grown quickly and compounded and that's a good thing. The complexity has also grown and compounded and that's a fundamental risk that's made it harder To manage. So y…

AI assessment note: “So your question is really about how we get there, how this filter or funnel works.”

Q I'm curious what happens when something goes wrong in one of these investments. It's, it's one thing to say you're spending more than half your time on these investments. I'm making these investments, but notoriously in private equity, if something goes wrong, it then really takes up your time. So how have you managed the inevitable problem children?

A Great question to ask. There are fewer of those happily today than there would be if this was an eight-year period ending in, or something like that. So we've got the benefit of strong tailwinds, yet there are still headaches along the way, and that's the how and when we've tested our resources. That's those, it's when those bottlenecks exist. If I'm plugging away on a Sunday afternoon, I know that we're probably inadequately Resourced. And if it's every Sunday afternoon, something has gone wrong. But what I recognize and fear is that, and this is a fear every investor shares, but it's just particularly acute given the size complexity of our portfolio and the relatively small size of the team. I fear a downturn where the number of problem children grows. Truly, I'm not overstating this. We haven't had many of those so far, but even a well-functioning company If we have a board seat, if we're engaged, or if there are liquidity considerations or conflicts to deal with, they're time consuming. And so that has been cumulative. When I said that the burden grows over time, that's especially true if we're inclined as we are to make investments that have a very long duration, then that compounding problem is just a little bit greater because you have fewer, fewer children going off to college. So more children in the house to cause problems.

AI assessment note: “We haven't had many of those so far, but even a well-functioning company”

Q times when you hear people talk about that cross fertilization of ideas, it's often within a direct investment organization. And I'm curious, you started and came into this seat in this, you know, let's call it a hybrid between being a fund investor and doing co-invest. In addition to the fund investments, what have you done within that portfolio to try to either add incremental return or these incremental insights?

A Well, if I go back to something I said before, which may seem obvious, but I think is an important observation. Our board didn't direct us to invest in any particular way. They want to build private markets exposure for all the reasons that we've discussed and And others. And we don't have any special financial. We, as investors here at the permanent fund, have no special incentive to invest directly in an operating company versus through an overpriced fund of funds, except to the extent that the expected returns are different, or it fits into our portfolio in a different way. So here's the point that I think is both obvious and important. It's our job to find the best mechanism or combination of mechanisms for deploying capital in private markets, and sometimes that involves lots of Layers of managers. In other cases, there are opportunities we think we can't Address. We can't capture unless we approach it more directly, and all of that has to happen in the context of reality, and our reality is that we are based in Juneau, Alaska, which is an amazing place to live, but it's obviously not the center of the deal flow universe, and we have, I'd say, maybe a mild version of the problem that a lot of U.S. public plans have, public pension plans, which is that it's very hard for us To pay people properly. It's been very hard for us to open an office outside of Juneau, and so hiring…

AI assessment note: “all of that has to happen in the context of reality, and our reality”