Permanent Fund trustees question plan to drop private equity risk discount

Alaska Permanent Fund trustees pushed back Wednesday on a staff proposal to drop a 25% discount the fund has applied since 2021 to its measure of private equity risk. The discount affects how much private equity the fund can hold before compliance reports flag it, because it counts only 75% of private equity exposure against the fund's risk limit, per the meeting packet. The $91.9 billion fund provides over half of Alaska's unrestricted general fund revenue. Trustees took no action at their annual meeting in Nome and asked staff to return in December.

Chief Risk Officer Sebastian Vadakumcherry said the board ordered the discount in February 2021 because trustees felt BlackRock's Aladdin system, the fund's risk software, which then rated private equity about 1.7 to 1.8 times as risky as public stocks, ran too high. BlackRock has since revised its risk methodology, and Aladdin now puts the multiple near 1.3. Keeping the discount would rate private equity less risky than public stocks, so Vadakumcherry proposed removing it, calling Aladdin one of the few systems that aggregate public and private assets.

Vice Chair Ethan Schutt said the chart "seems to show that the standalone risk of these two asset classes has converged and is effectively equivalent at this point," though private equity carries heavy debt and extra fees. A Callan consultant noted BlackRock has invested in firms selling private equity products. Advisor Janet Becker-Wold called the model's drop in public-private equity correlation, or how closely the two move, the bigger issue, because it changes the fund's estimated total risk.

The board voted in May to cut its private equity target from 18% to 17%. Chair Jason Brune said staff disagreed with a system "we're paying several million dollars for" and questioned whether BlackRock "might have some ability to influence where they want the puck to be rather than where it is." Chief Investment Officer Marcus Frampton said the system monitors compliance and noted the May vote relied on Callan's 10-year forecasts.

Staff had planned a February vote, but Schutt urged December instead. Brune also wants a recommendation then on whether to keep paying for BlackRock's service.