The Alaska Permanent Fund was formed in 1976, the corporation in 1980. After the state economy showed a significant spike in revenue from oil production in the 1970s, state leaders at that time decided to preserve a portion of the revenue for future generations, and they set up the Permanent Fund. Since then, the fund has grown to a total market value of $62 billion and has paid a total of $23.7 billion in dividends to eligible Alaskan residents.
PDI caught up with the APF’s Marcus Frampton, director of investments, and Jared Brimberry, portfolio manager, to find out more about the organisation’s past and current involvement with private debt.
What is your history of engagement with private credit?
MF: The Fund has had a longer standing exposure to private credit than many other public pensions or funds. The fund’s exposure to this asset class started in 2007 with a focus on distressed debt in anticipation of the crisis. After the crisis, the fund was very active in mezzanine and made large commitments to Oaktree and Audax mezzanine funds, for example.
Which debt strategies do you currently prefer?
JB: We continue to look at opportunistic and distressed opportunities, but it’s not our focus.
MF: Right now, we are more broadly focused than distressed and we have a preference for senior strategies. Our direct lending investments tend to be senior loan funds, particularly through unlevered feeders. We like the risk-return profile of private credit and senior lenders, but we’re not as enthusiastic about levered fund structures.
One of the motivations behind our focus on limiting fund-level leverage, is because of where we are in the cycle. Now does not feel like the time to be pushing the envelope. We have an explicit absolute return benchmark of Consumer Price Index plus 400 basis points, which is currently about a 5 percent to 6 percent return objective. We feel we can beat that without adding much additional risk.
Our staff-led foray into direct lending began last year and we’ve located partners in sponsored and non-sponsored markets. Whitehorse and Monroe are two firms we’ve recently partnered with, and we’ve also committed to a unitranche strategy.
What do you think about GPs’ use of subscription lines?
MF: We’re fortunate in that we’ve been in these markets for a while, so we’re not racing to catch up on our exposures. In some ways, subscription lines can make things more efficient, and quarterly capital calls don’t bother us. But we’ve seen other LPs make a commitment and six months later nothing has been drawn.
JB: Most of our managers say subscription lines are useful if they are done on a monthly or quarterly basis. But regardless, we make sure the returns we see reflect the risk we are taking, and we make sure the GP is not using the subscription to hit their internal rate of return targets.
What level of performance is expected from private credit strategies?
MF: I think the 5 percent to 6 percent net IRR is what we are looking for in the asset class, but perhaps a little bit higher returns for unsponsored direct lending, even as high as low double digits. Our five-year net return in private credit was 7.9 percent, and we don’t want to compromise from there.
What about the state of deal terms in the mid-market credit space?
MF: The upper end of the mid-market, say EBITDA of $50 million or above, is getting heated.
JB: We’re definitely concerned in the syndicated loan market. But we have not committed to managers focused on the upper middle-market or syndicated loan market, where they have the covenant-lite deals. But as far as managers in the mid-to-lower market we partner with, we are very focused on our due diligence, making sure the managers are disciplined in their terms, leverage, and attachment points. Most of the covenant-lite deals are in the syndicated loan market.