Permanent Fund will revisit private equity risk rules in December

Alaska Permanent Fund trustees on Wednesday asked staff to bring back in December, rather than February, a proposal to stop discounting how the fund measures the risk of its private equity investments, as trustees, staff and the fund's consultant questioned the BlackRock risk model behind the numbers.

Since 2021, the fund has counted only 75% of its private equity risk estimate against the board's risk limits, according to the meeting packet. That affects how much private equity the fund can hold before its compliance reports flag it. The $91.9 billion fund provides more than half of the state's unrestricted general fund revenue.

Chief Risk Officer Sebastian Vadakumcherry said the board ordered the discount in February 2021 because trustees felt the fund's risk software, BlackRock's Aladdin system, overstated private equity's risk. At the time, it rated private equity about 1.7 to 1.8 times as risky as public stocks. He said staff thought that estimate was appropriate then. BlackRock has since changed its model, and Aladdin now puts the multiple near 1.3. With the discount still applied, the fund would count private equity as no riskier than public stocks, so staff proposed dropping it.

Staff don't trust the new numbers either. Vadakumcherry said staff pushed back on BlackRock's change and still don't understand it, and that he personally thinks the real multiple is closer to 1.7. Chief Investment Officer Marcus Frampton called Aladdin "a bad risk model for private equity," saying it was his opinion. He said the fund uses it to monitor compliance, while the board's May vote to cut its private equity target from 18% to 17% relied on 10-year forecasts from Callan, the fund's investment consultant. Vadakumcherry said that despite its flaws, Aladdin is one of the few systems that can measure public and private investments together.

Trustees questioned the model, too. Vice Chair Ethan Schutt said it now shows the two asset classes' standalone risk as "effectively equivalent," even though private equity carries heavy debt and an extra layer of fees. Advisor Janet Becker-Wold said the model's lower estimate of how closely private and public stocks move together is the bigger issue, because it changes the fund's estimated total risk. A Callan consultant said he was very skeptical of the change and noted that BlackRock has invested in firms that sell private equity products. CEO Deven Mitchell suggested the board could even consider an adjustment the other way, counting private equity as riskier than the model does.

Board Chair Jason Brune noted that staff were disagreeing with a system the fund pays 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." He asked staff for a recommendation in December on whether to keep paying for the service.

Staff had planned to ask for a vote in February. Schutt said that if there's a problem, the board should act a meeting sooner, in December, and Brune agreed.