Editorial: Doubling up a winning strategy

US state-owned Alaska Permanent Fund Corporation (APFC), which has invested through its partnership with asset manager Crestline Investors an undisclosed amount in Denali Therapeutics’ $217m series A round.

When you have a winning strategy, double up.

So appears to be the mantra for the US state-owned Alaska Permanent Fund Corporation (APFC), which has invested through its partnership with asset manager Crestline Investors an undisclosed amount in Denali Therapeutics’ $217m series A round.

APFC in its 2014 annual report said it had invested $64m in another then-startup, Juno Therapeutics, to own 30% through a partnership with Crestline Investors. Juno floated in January and APFC reaped a paper profit of about $1bn on its holding at the initial public offering.

By trying to repeat the trick, it is reinvesting alongside venture capital firm Arch Venture Partners, which specialises in early-stage deals and university spin-outs and has in founding partner Robert Nelsen one of the rare breed of serially successful venture investors as half of his 30 declared deals have been valued at at least $1bn.

APFC accounted for its Juno deal as “other special opportunities” separate from the absolute return mandate Crestline manages.

Though still a rounding error for an institution with more than $50bn under management, moving to more direct investing seems to be working for the state wealth fund (SWF). APFC returned 2.8% in the quarter ended March 31 and 4.7% in the fiscal year-to-date, according to a news release from the $53.9bn SWF.

In its annual report, APFC said: “One way we are moving forward is to expand the programs that focus on private asset investments for the fund.

“In 2004, the board first began investing in private equity and added infrastructure in 2007. Initially the corporation relied exclusively on outside gatekeepers to make these investments on our behalf.

“Over time we have become more knowledgeable about private assets and comfortable that the corporation can build expertise in-house to make prudent investments, and at a lower cost than using outside managers.

“To that end, the board authorised staff to begin infrastructure and private equity co-investment programs alongside the permanent fund’s existing programs. And we have directly undertaken more special opportunities and focused investments, including an investment in Juno Therapeutics.”

Similar trends have been seen in other regions, with recently released data identified by law firm King & Wood Mallesons from the European Private Equity and Venture Capital Association (EVCA) that found SWFs (many from the Middle East and Asia) were backing UK (11.3% of commitments) and Nordic (7.1%) based managers over southern and central and eastern Europe, where government agencies separate to defined SWFs are providing more of the capital, between 30% and 60%, respectively.

But the regulators are keeping a close eye. Marc Wyatt, acting director of the Office of Compliance Inspections and Examinations at the US Securities and Exchange Commission, in a speech at a Private Equity International event in New York said: “We have detected several instances where investors in a fund were not aware that another investor negotiated priority co-investment rights.

“Allocating co-investment opportunities in a manner that is contrary to what you have promised your investors can be a material conflict and can result in violations of federal securities laws and regulations.”

He added the regulator was also looking at whether firms were shifting expenses away from parallel funds created for insiders, friends, family and preferred investors to the main commingled flagship vehicles.

“Frequently, operational expenses, broken-deal expenses, and even the formation expenses of the side-by-side vehicle are borne by investors in the main fund,” Wyatt said in a report taken by PEhub.

“Some of these expense items are small, but some, such as the broken-deal expenses of an active fund, can be quite large. This practice can be difficult for investors to detect, but easy for our examiners to test.”

As the number of large venture or growth equity rounds of at least $100m in size continues to climb - with 35 in the second quarter so far, following 59 in the first three months of the year, according to Global Government Venturing data – so the opportunities and scrutiny will increase.

See more from this Government Report: Alaska (AK), US


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