Alaska Permanent Fund CIO Warns Private Markets Have Lost Their Edge

In Brief:

The Alaska Permanent Fund's chief investment officer is pumping the brakes on private market investments, warning that the golden age of alternative assets may be over as valuations have soared and risk premiums have evaporated. Marcus Frampton, CIO of the $85 billion Alaska Permanent Fund, has cut private equity commitments by half since 2021 and expressed deep skepticism about private credit's current appeal, arguing that investors are no longer being adequately compensated for locking up their capital in illiquid investments. Speaking alongside CEO Deven Mitchell on Bloomberg's Odd Lots podcast, Frampton detailed how the fund - which provides both state revenue and annual dividends to Alaska residents - has shifted strategy amid what he sees as an overheated private markets environment where traditional risk premiums have largely disappeared.

Big Picture Drivers:

• Valuation Inflation: Private equity buyout multiples have surged from 5-6x EBITDA in the early 2000s to mid-teens today, fundamentally altering the risk-return equation

• Capital Saturation: Massive capital inflows into private markets have compressed spreads and eliminated many of the illiquidity premiums that previously justified these investments

• Interest Rate Environment: The prospect of rapidly declining federal funds rates creates a complex backdrop that makes traditional asset allocation decisions more challenging

• Institutional Overcrowding: Too many endowments and pension funds following similar playbooks has reduced opportunities for outperformance in alternative assets

Key Insights:

• Premium Erosion: Private credit spreads versus high yield bonds have compressed from several hundred basis points five years ago to just 100 basis points today, fundamentally undermining the investment case for illiquid lending.

• Liquidity Advantage: The fund's reduced private market exposure has created significant dry powder that could be deployed opportunistically during market stress, providing a competitive advantage over over-allocated peers.

• Valuation Disconnect: Current private equity valuations at mid-teens EBITDA multiples represent such a dramatic departure from historical norms that traditional return expectations are likely unrealistic.

• Timing Paradox: While the expensive equity market would normally warrant caution, the expectation of rapidly declining interest rates creates a compelling backdrop that prevents aggressive underweighting of risk assets.

• Capital Discipline: The fund's willingness to reduce allocation to previously successful strategies demonstrates the importance of maintaining investment discipline even when departing from conventional institutional wisdom.

• Dislocation Preparation: Positioning for potential trouble in private equity and commercial real estate by maintaining liquidity and flexibility rather than chasing current market trends.

Memorable Quotes:

• "I started my career at Lehman Brothers in 2001, and I remember going through LBO training. You sketch out your typical LBOs, maybe five, six times EBITDA with three, four times leverage, and the debt pays down. By the end of the 2000s, buyouts were eight, nine times EBITDA. Now, on average, US mid-market buyouts are mid-teens EBITDA multiples" - Marcus Frampton, explaining the dramatic valuation inflation in private equity

• "We benefited from leaning into privates from, call it 2010 to 2020. And we just felt kind of in 2021 that it's unlikely that investors are going to get the return premium" - Marcus Frampton, on the strategic shift away from private markets

• "I don't think of it as like an illiquidity premium that you get. I think it's an illiquidity premium that you have to demand" - Marcus Frampton, challenging conventional thinking about private market returns

• "There's no investment idea that's so good that too much capital can destroy it, ruin it for everyone" - Marcus Frampton, quoting Barton Biggs on capital oversaturation

• "We want to be the buyer with deep pockets in a dislocation. When you look around the industry, people that are over allocated to private equity, I think we'll find that they don't have that luxury and we want to have that luxury" - Marcus Frampton, on positioning for market opportunities

The Wrap:

The Alaska Permanent Fund's strategic retreat from private markets signals a broader reckoning in institutional investing, where the chase for alternative asset returns has pushed valuations to unsustainable levels. Frampton's warning that investors are no longer being adequately compensated for illiquidity comes at a time when many endowments and pension funds have built their entire strategies around private market allocations. The fund's decision to maintain dry powder while peers remain overallocated could prove prescient if market dislocations create the buying opportunities that traditional alternative strategies were originally designed to capture. This shift represents not just tactical repositioning but a fundamental challenge to the institutional investment orthodoxy of the past decade.