This article was republished with permission from dermotcole.com.
A year ago the news broke that an investment firm called Westward Partners had purchased the Three Bears grocery chain, which has 20 stores in Alaska and Montana and $300 million in annual sales.
But there was no hint that the state of Alaska was a secret investor in the deal through the Alaska Permanent Fund.
Alaskans should have been told last February that the Permanent Fund was involved.
The rules about the investment of public funds in companies with a connection to Alaska need to be changed to limit the appearance or the potential of political corruption.
The Permanent Fund board is a political creature of the executive branch, with members appointed by the governor and not subject to a confirmation vote by the Legislature.
The public is not allowed to know how much the “Alaska Future Fund” invested in the grocery chain, an agreement conducted under a program that the Alaska Permanent Fund operates with little to to no public disclosure, relying on language inserted into state law in 1980 that does not provide the blanket secrecy the fund managers claim.
News of the investment in Three Bears is contained in an update from the two companies that run the two funds set up to invest $200 million in ventures that have some direct or indirect link to Alaska—Barings and McKinley Capital.
A Feb. 15 memo from the fund said the Three Bears investment took place a year ago.
We are also learning for the first time about state investments in ventures that include: a self-storage company in Juneau; All Alaska Tours in Anchorage; Atlantic Aviation, which services aircraft; Ekona Power, which is working on converting natural gas to hydrogen; Fleetzero, an Alabama company that wants to build electric cargo ships; Macro Oceans, a California company that processes seaweed; Radiant Industries, a California company working on nuclear power; and SafeAI, a California company that wants to retrofit heavy equipment with AI technology for safety.
The permanent fund says that we are too early in the investment process to draw conclusions about performance of the investments made by Barings and McKinley Capital.
“Note that neither manager has generated material realizations/exits from their portfolio and valuations of the existing investments are generally based on a private appraisal of illiquid assets (though one of the funds includes a publicly- traded company which is valued at its current share price),” the fund said.
The “private appraisal of illiquid assets” means that the investment return numbers should be viewed with skepticism.
Part of the problem is that Barings and McKinley Capital were the only firms that responded to the permanent fund’s request to take on the task of investing in companies with a connection or potential connection to Alaska.
Investment companies that failed to submit proposals to manage a slice of the $200 million told the fund staff that “the opportunity set of suitable private equity opportunities in Alaska that would meet the targeted returns and other requirements of the program was too limited relative to the amount of capital they were being asked to deploy.”
The fear of other companies that the program wouldn’t work with in-state investments alone casts doubt on the wisdom of this approach, which makes public disclosure of investments all the more important. The Legislature needs to start performing the oversight duties it has long neglected.
The Alaska Future Fund, set up by Barings, so far has generated a gross internal rate of return of 31 percent. The fund has committed $68 million and transferred $53.6 million. About $2 million has been distributed back to APFC and the net asset value of the investments was $64.2 million last fall.
(The memo to the permanent fund lists eight investments, but this press release lists a ninth as of December 31—Juneau Self-Storage, “a market leading self-storage owner/operator with over 1,400 total units across its three locations throughout Juneau, Alaska. The company was founded in 1985 and continues to be locally owned and operated.” )
Here are the nine investments by Barings in the Alaska Future Fund, as described by the company:
• Nebari Natural Resources Credit Fund – This private fund focuses on providing development capital in the form of loans to natural resources / mining borrowers. The firm has staff in Alaska but does not currently have any active investments in Alaska.
• Alaska Communications – In 2021, a consortium led by Freedom 3 Capital acquired formerly publicly traded Alaska Communications via a leveraged buy-out and Barings co- invested in the transaction.
• Grant Aviation – Headquartered in Anchorage, Grant Aviation is a leading commuter airline in Southwestern and Western Alaska. In 2021, a private equity firm based out of Seattle, Westward Partners, agreed to acquire Grant Aviation and Barings co-invested in the transaction.
• Contango Ore – Contango Ore is a publicly-traded exploration-stage metals and mining company with operations in Alaska focused on the exploration and development of gold deposits. In September 2020, Contango executed on a series of transactions including the addition of Kinross Gold Corporation, a leading gold producer with extensive experience in Alaska as the manager and operator of Peak Gold. In June 2021, Barings co-invested with several other institutional investors in an equity raise consummated by Contango to support its growth. Contango announced that it received $10 million from the state.
• Tiger IPF – Barings’ Tiger investment represents a co-investment with leading private infrastructure investor, Tiger Infrastructure, in the development of a new air cargo terminal at Ted Stevens Airport. The new terminal will provide facilities and equipment for fueling and de-icing as well as warehouse and office space.
• Three Bears – In February 2022, Barings co-invested with Westward Partners (the same sponsor as led the Grant Aviation investment) in the acquisition of Three Bears, an owner- operator of a chain of retail stores. The Company was founded in Tok in 1980 by Alaskans and the store’s footprints, inventory and pricing are designed to meet the region’s unique needs.
• KSL Capital Partners CV I – KSL is a leading private equity firm operating primarily in the travel and leisure sectors. KSL acquired Ross Aviation and agreed to merge the business with Atlantic Aviation in 2021. Barings co-invested alongside KSL in their minority ownership of the merged business. The company operates FBO (fixed base operations) to service aircraft at airports including Ted Stevens Airport and many other locations outside of Alaska.
• All Alaska Tours – Founded in 1991 and headquartered in Anchorage, All Alaska Tours (AAT) is a family-owned business offering vacation planning and tours. AAT is currently led by its founder, Al Koch, and supported by 15 employees offering statewide coverage. The company operates through three lines of business: (a) the core wholesale travel booking operation; (b) direct to consumer booking; and (c) luxury guided tour services. Barings invested into AAT in June 2022 as part of a transaction led by Pt Capital.
*The Na’Nuk Fund, set up by McKinley Capital, has investments totaling about $100 million.
The gross internal rate of return was 1.6 percent as of last September. “Performance has declined significantly over the last several quarters due to a decline in the share price of a publicly-traded investment,” the memo said.
The investment in question is probably Astra Space, which has taken a major hit since early 2021. The stock is now trading at about 55 cents a share. The stock peaked at nearly $20 in early 2021 and the company went public in July of that year. A year ago the stock was about $3.
Astra has had a series of setbacks. But McKinley Capital says it is a “high profile success story in Alaska’s emergence as a strategic location for the new space industry.”
Here are the investments by McKinley Capital in the Na’Nuk Fund, as described by the company:
• NIF Seafood Holdings (Peter Pan Seafoods) – McKinley invested in this Alaska-based seafood processor with operations in King Cove, Dillingham, Port Moller, and Valdez with fast-growing value-added sales and trading operation to create a vertically integrated and diversified seafood company. Na’Nuk Fund invested alongside Renewable Resources Group, a seafood investor with $2 billion of AUM, and Rodger May, a serial entrepreneur with deep seafood industry sales and distribution experience.
• LP Investments in Venture Capital Funds – Consists of Limited Partnership investments with Airbus Ventures, Earthshot Ventures, Lowercarbon Capital, Pipeline Capital Partners, and Voyager Partners Fund. These investments represent limited partnership commitments to venture capital funds which are expected to have some connection to Alaska. These fund investments have also led to co-investments in opportunities such as Astra Space and SpinLaunch.
• Astra Space – McKinley invested in Astra Space across three separate private financing rounds. The company develops and launches rockets including multiple rockets from the Pacific Spaceport Complex in Kodiak. Subsequent to McKinley’s investments, the company went public via merger with a SPAC in July 2021.
• Ekona Power – Venture-stage investment in a Vancouver, BC-based company working on creating a solution for producing industrial scale hydrogen by converting natural gas into hydrogen. Ekona has created partnerships with Alaskan energy companies.
• Fleetzero – Seed stage investment in a company focused on building electric cargo ships with containerized and swappable batteries. The company recently purchased its first ship to retrofit with electric batteries. Fleetzero views the Alaskan coast as a key battery swapping location for shipping routes from the West Coast to Asia. Fleetzero is based in Auburn, AL.
• Macrooceans – Macrooceans sources seaweed from Alaskan growers and uses a zero-waste system to process it into a variety of products including alginate, alternative protein, and ultra-pure extracts. The company is based in San Francisco, CA.
• NIF Spin Holdings – SpinLaunch is a venture-stage company focused on developing new approach to launching low earth orbit satellites. Its current plans are focused on remote Alaska islands for eventual launches in the future. McKinley invested in the Series A and B rounds. The company is based in Long Beach, CA.
• NIF Aleutian Air Holdings – In March 2021 McKinley invested alongside Wexford Capital in a new regional airline launching Q1 2022 and providing service between Anchorage and Dutch Harbor. The company held its inaugural flight in November 2022.
• NIF Chem Holdings – Seed investment in an greenfield Alaska energy production company.
• Radiant Industries – McKinley participated in a $12.6MM Series A round in a small scale / portable nuclear company alongside several other venture investors. The company is based in El Segundo, CA.
• SafeAI – McKinley participated in a $37MM Series B round in a company focused on retrofitting heavy equipment with AI technology to prevent accidents. SafeAI is based in Santa Clara, CA.
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