Marcus Frampton's Co-Investment Concept

Art by Wesley Allsbrook

Marcus Frampton has been at the Alaska Permanent Fund’s chief investment officer helm for nearly one year, and he’s getting the $66 billion organization more involved in private equity co-investments.

Frampton explains how the process came to pass, how the plan will prepare for an economic downturn, and how the Alaska sovereign wealth fund is able to obtain and retain talent in the chilly state while plugging the accomplishments of his team members along the way.

CIO: How does the process of carrying out a co-investment typically play out and were there any initial hurdles that experience has helped you smooth out over time?

Frampton: Sure, so the process of co-investments has evolved over the years. I first got involved in co-investing actually in the mid-2000s with Steve Moseley who’s now our Head of Alternatives at the Permanent Fund. We were at a private equity firm at the time that specialized in co-investments and back then it really was a post-close syndication that was the most common approach for sponsors. And over time, the process has gotten more complex and there are more variations on how it plays out. Today, there are situations where the Permanent Fund will take a syndication of a deal that a sponsor has already closed and that has been pretty consistent over the last 20 years in how that process plays out. We’ve also gotten involved in situations where a sponsor is actively bidding on an asset and does not have exclusivity and I think a fewer number of limited partners play in that market. As co-investing has gotten more crowded we’ve tried to differentiate ourselves in our flexibility and in our willingness to get involved early in situations.  There are certainly hurdles building programs like this at a public fund.  When we first started getting involved in pre-win situations we had to make sure that we had budget coverage for dead deal costs and that we were thoughtful about dead deal costs because those numbers can grow to big numbers in a short period of time.  Even having worked out a budget for dead deal costs and a good approval process for exposing ourselves to them, we still have to keep dead deal costs on a tighter leash than when Steve and I were in the private sector.

But to answer the basic question of how it typically plays out, typically we’ll be contacted by one of our private equity or infrastructure managers around the deal that they’ve either won or are looking at.  We try to be pretty responsive on the upfront stage around even with simple things like getting the nondisclosure agreement signed, getting an initial call with the sponsor, looking at materials and giving quick feedback around whether it’s something we’re interested in or not. We’re seeing three or four new co-investment deals a week and I think the reason we’re getting that high level of deal flow is that we’re really responsive up front, and then we’ve got a process with our investment committee where we can be pretty nimble and work on a variety of timelines.

A typical situation might be a one month process where we meet or do a call with the management team of the potential investee company, we’ll retain an outside counsel to review the legal documentation on the deal, and then we’ll do a series of phone calls with the sponsor, all of which we have to synthesize into an investment committee memo for our colleagues to ultimately approve the transaction.  Finally and importantly, we have to keep a pretty high level of communication with the GP along the way; if there are issues we’re running in to, we communicate that pretty fast.

CIO: How do you choose your managers for this program?

Frampton: One of the things that I believe in and I think my colleagues believe in is not picking private market fund managers for any reason other than that they’re the best at what they do in their given area.  Essentially that they’re top quartile, that they have a consistent team, a proven track record, and an attractive market opportunity. We don’t select managers because we think they’ll show us co-investments, similar to the fact that we don’t pick managers because they’ll discount their fees (we focus on net-of-fee performance and value added). We have found many instances where we back managers that have not historically had co-investment opportunities but did subsequently.  We think that by far the most important thing to get right is the fund selection and that co-investments should come second.  That approach has worked great for us.

CIO: We appear to be very late in the cycle, what are you guys doing to protect your losses in a potential downturn? What kind of de-risking measures are you guys taking?

Frampton: Sure. Ultimately we’re a long-term investor and our constituents in the state of Alaska are expecting us to earn a CPI + 5 return over a multi-generational period of time.  Additionally I’m acutely aware of the fact that our edge does not lie in calling year to year market swings, and so asset allocation decisions we make based on views of the market cycle tend to be on the margin. However, on the margin we are holding more cash now. We’re considering exiting private market assets through a secondary sale, and we’re emphasizing hedge funds in a beta neutral format. Part of that reflects a tactical view of where we are and part of it is just my perspective on how a conservative investor should run their portfolio. I think that it’s hard to ignore though where various market measures are: public equity valuations are high, real estate cap rates are relatively low and multiples on private equity deals are also very high relative to history.  Recently I was doing an analysis of the cyclically-adjusted Schiller PE Index versus subsequent 10 year returns, and that analysis suggested that the next 10 year equity returns should be low single digits plus the dividend yield. Our consultant, Callan, has a little bit higher outlook for equities, but I think everyone agrees the return environment from here is likely to be subdued. So that’s why we’re trying to on the margin to be conservative.

Also within our equity portfolio our head of public equities, Fawad Razzaque, is very thoughtful about finding value in the markets. So he’s emphasized to me and to others internally that the ratio of multiples on value stocks to growth stocks right now is at an all time low and actually 2 standard deviations beyond where it’s historically been. So he’s got an overweight in his portfolio to value stocks, and for similar relative valuation reasons, is overweight in his portfolio to emerging markets.  Portfolio positioning moves on the margin over time have added value for us. And so we’re always looking for where the value is in an expensive world and then on the margin, trying to hold more cash and emphasize hedge funds.

CIO: Why do you think this program has been able to succeed?

Frampton: I think the reason why we’ve had success in this program is because of the consistency of our approach. Steve and I have been doing co-investments in private markets for over 15 years, and we’ve tried to stay disciplined over time. In ’07 and ’06 there were a lot of LPs piling into co-investments like they are today and we’ve tried to in periods like that differentiate ourselves by being easy to work with, with sponsors, and then to avoid the appeal of putting more money out in an environment where there are more deals but more expensive deals. So really we’ve tried to be consistent and apply a consistent approach and then be tempted to put more capital out in an environment like this while many of our peers are doing that right now.

We are also fortunate to have a very strong overall team that Steve and I are working with.  Yup Kim, a senior portfolio manager in Private Equity & Special Opportunities, has been with the fund since 2015.  Jared Brimberry, our senior portfolio manager of Private Credit and Absolute Return, joined a little after Yup.  More recently we’ve grown the team further by adding Ross Alexander, our Infrastructure Portfolio manager; Rafael Ramirez, a Private Equity portfolio manager; and two private markets associates, Logan Rahn and Samanatha LaPierre.  This entire group has been critical to our success.

CIO: And how does one attract and retain talent in Alaska?

Frampton: Well we have a lot to offer. It’s a good work/life balance at the Permanent Fund. We tend to do the right amount of work to get to the right answer, but stop short of the face time and excessive memos and analysis that can happen out there. Other places I’ve worked we had very long investment memos whereas here at the Permanent Fund we do the analysis that’s important but we don’t package it up in a 100 page investment committee memo. So we’ve tried to attract people by not keeping folks at the office at 2 a.m. the night before an investment committee meeting. We’ve also tried to, and I think with some success, given responsibility to promising younger members of our team where they have earned it.

An example of this is, Jared Brimberry, the person on my team leading the private credit co-investment program. He’s got a lot of experience in a short period of time because he’s proven that he does a great job when we give him that experience.  I think whereas at a bigger firm in a bigger city, junior people might not have as much opportunity to move up over time. It has been appealing to some recruits. And then also, just being in a place like Juneau with great outdoor activities appeals to a lot of people.

We also have recently recognized and discussed internally the idea of opening offices or allowing employees to work remotely outside of Juneau.  We’ve certainly noticed some college endowments and state pension funds that have started operating out of multiple offices within one state (like Oregon State Treasury) or even going international (like Texas Teachers).