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Permanent Fund makes winning bet on a startup

  • Author: Alex DeMarban
  • Updated: November 15, 2016
  • Published November 14, 2016

The Alaska Permanent Fund Corp. has made another winning bet on a startup company, banking more than $300 million after providing early capital for a giant home-rental firm that took advantage of the collapse of the nation's housing market.

That initial investment came in 2012, when Permanent Fund managers put down $600 million to help start American Homes 4 Rent, created by California self-storage billionaire B. Wayne Hughes Jr. of the Public Storage empire.

The company now owns 48,000 homes in 22 states — none in Alaska — after it snatched up single-family homes at rock-bottom prices during foreclosures. With the company's rent-related income on track to reach about $900 million this year, share prices have jumped by about 33 percent, to $20.53 on Monday.

The misfortune of others was a boon to the Alaska Permanent Fund Corp. The increase in stock price presented a prime opportunity for the Alaska corporation, which in September sold 43 million shares for $946 million, according to a Securities and Exchange report filed by the rental firm early this month.

The sale netted the fund $325 million, officials said. The fund still retains about $35 million in shares in the company.

The fund's board and its former CEO, the late Mike Burns, felt comfortable with the risk associated with real estate, said Angela Rodell, a former state revenue commissioner who is now the fund's chief executive. Also, she said, Hughes does his homework and knew he could acquire homes inexpensively following the collapse of the housing market bubble, in which unscrupulous lenders encouraged unqualified people to get mortgages. The mortgages were bundled into big securities with undisclosed risks.

The collapse in housing values began about a decade ago as a result of the credit-default swap crisis that led the nation into recession, with recovery beginning around 2012.

In 2012, the fund's managers knew that "demand was moving into the rental sector, rather than the home-ownership sector," Rodell said.

The state's winning move was highlighted by a Wall Street Journal article on Sunday that said the state's bet on housing has helped Alaska moderate giant losses from the oil-price crash.

Returns at the $55 billion fund, seeded with oil-production royalties and providing annual checks to Alaskans, have outpaced traditional oil-based income in Alaska that has tanked in recent years amid low oil prices.

Alaska lawmakers and Gov. Bill Walker are increasingly eyeing a portion of the fund's annual returns to help solve the state's multibillion-dollar deficit that has been plugged in recent years with other savings.

The fund's investment into American Homes 4 Rent represents the Permanent Fund's first foray into private equity investing, where wealthy investors or funds provide capital to companies, potentially receiving a big share of gains after the company's value rises.

The Permanent Fund has notched at least one other big payoff in private equity since entering the field as a way to diversify the portfolio away from stocks and bonds.

In 2013, the fund invested $129 million into Seattle-based Juno Therapeutics, a biotech company aiming to genetically program a patient's immune-system T cells to kill cancer cells. In May, after shares of the company had risen, the Permanent Fund sold one-third of its initial stake in the company, generating $335 million in cash while still retaining more than $600 million in stock.

The fund's private equity assets were worth $3.5 billion on June 30, according to the Permanent Fund's annual report for fiscal year 2016. The investments returned 14.4 percent in fiscal year 2016.

Overall, the Alaska Permanent Fund gained 1 percent in fiscal year 2016, ending the year on June 30 valued at $52.8 billion.

"Although overall returns for the global stock markets were generally negative, these losses were offset by significant gains in bonds, real estate, private equity, and infrastructure investments," the fund reported in September.

The fund's expansion into private equity continued in fiscal year 2016, with the fund committing $867 million to 27 private equity partnerships, the annual report said.

In July, the Alaska Permanent Fund invested $48 million into Indigo, an agriculture technology company based in Charlestown, Massachusetts, that is attempting to create hardier strains of crops that can handle low-water conditions, using beneficial microbes found in plant tissue. The company already has a cotton product that's being used by farmers, the company reported in July.

Not all private equity investments have panned out as the fund has expected but the fund takes a long-term view that could eventually result in a laggard company becoming a winner.

Rodell said an initial investment in fiscal year 2014 into Riverstone Energy, a company that buys up energy plays around the world, has dropped in value from $360 million to $318 million. The collapse in oil prices that began in summer 2014 contributed to the declines.

"It's down," Rodell said. "But the nice thing about private equity is these are long-term investments, usually with a commitment of five to 10 years, so I hope this turns around and we recoup that loss."

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