Friday letter: Chips on the table

Last Friday, The Alaska Permanent Fund Corporation (APFC) disclosed a brand-new, $750 million separate account with Apollo Global Management. Although the establishment of separately managed accounts is now common among blue chip investors in alternative assets, the account established by the $51.5 billion APFC — which manages assets generated by the Alaska oil pipelines — is the largest in recent memory dedicated entirely to investments in private credit strategies. 

APFC and Apollo structured the account across four separate investment strategies, with a fifth that can be implemented to fund capital calls. APFC will commit $350 million across three Apollo credit vehicles (Credit Opportunities Fund III, Apollo Credit Strategies Fund, and Structured Credit Recovery Fund III) and another $175 million to an “APFC Unconstrained Credit” fund, which will invest in stressed and distressed credit opportunities. Another $225 million was allocated to direct and co-investment opportunities across Apollo’s investment platform. The fifth and final strategy, known as the “Liquid Account”, will allow APFC to invest in cash equivalents that can be drawn upon to fund Apollo-mandated investments.

In exchange for placing such a hefty bet on Apollo, which interestingly was not one of AFPC’s active investment managers prior to the formation of the account, the Leon Black-led group granted the AFPC a substantial (though undisclosed) concession on fund terms, according to documents made available to Private Debt Investor.

“Through the combination of the partnership’s five anticipated investment categories, the APFC will gain access to historically strong risk adjusted performing strategies through a customized structure designed to closely align our interests with those of Apollo,” according to an APFC memo. “Furthermore, the APFC’s blended fees will be significantly below blended fees for these vehicles. The APFC will also gain access to direct investments that it would not otherwise be able to access.”

The latter point is a key one. Although sizeable, Alaska’s holdings in private debt are relatively limited in scope, with $1.2 billion in assets spread across mandates managed by Oaktree Mezzanine, Audax Mezzanine and Crestline. While each of those firms offers impressive coverage of the private debt space, Alaska’s desire to expand its footprint in the asset class required a diversification of its manager pool.

It seems they’ve found a more than adequate partner in Apollo. Though commonly referred to as a private equity firm, credit has emerged as Apollo’s largest investment platform ($101 billion in credit AUM, compared to $48 billion for private equity, as of 31 March), with specialties in US performing credit, structured credit, opportunistic credit, non-performing loans and European credit. The firm also recently backed a new business in Alaska, having invested in an exploration and production company Caelus Energy Alaska to pursue deals in the state’s thriving oil and gas market.

Though hardly unusual, the size and scope of APFC’s separate account for private credit speaks to just how important credit-related investment has become for institutional investors. Within a single mandate with a large manager, an investor can access an array of credit strategies which give a significant diversity of risk / return profiles, and chip away at fees at the same time. Granted, it's a luxury that is really only open to large institutional investors, but segregated accounts like APFC's with Apollo are only going to become more common.