Sunday, April 12, 2015

Conflicted Alaska Publisher Says Borrow Big and Invest

Alaska Dispatch News publisher Alice Rogoff, the wife of Carlyle Group co-founder David Rubenstein, started off today's column stating she bought the paper to offer increased economic coverage.  Her column reads more like influence economic development.

Besides oil, Alaska has another vital resource -- huge cash reserves and assets. This, in turn, provides us credit and the ability to borrow money against it. And with today’s low interest rates, it may be the perfect time for our state to borrow. We could then take those cash loans and invest them in the markets, and earn a rate of return much higher than the interest we pay. Anything we’d earn above the interest rate could be used to help fund government.

We have approximately $100 billion in our various investment accounts -- more than 15 times the amount of cash the state spends annually at current spending levels -- that includes the Permanent Fund, state savings and investment accounts, and state employee retirement funds. That could secure billions in working capital at low rates.
Borrowing money to invest in financial markets hardly seems a purpose or function of state government.  Rogoff gives the impression of guaranteed money from the spread between low borrowing rates and high investment income.  It's not.

There seems to be a move to lever up state and local governments prior to the full implementation of new pension accounting rules.  This is precisely the wrong time to borrow against state employee retirements funds, most of which are badly underfunded.

The Carlyle Group's David Rubenstein, Rogoff's husband, suggested something similar in 2011:

The state, currently flush with surplus revenue thanks to high oil prices, could use its wealth to create an "Arctic sovereign fund," attracting investors, especially if it provided incentives and favorable terms, Rubenstein said.
The bust in oil prices should be instructive for two reasons.  One, it reveals how markets don't go up in a linear fashion, as Rogoff suggests.  And two, the bust turned the Alaskan investment thesis from one funded by surplus revenues to one capitalized by debt.  The latter is significantly riskier.  Rogoff proposed:

The state of Alaska can borrow against its vast cash and investment funds, perhaps at rates of about 2 percent. If Alaska did take out a loan on such terms -- let’s say $50 billion -- that money could be prudently invested to earn at least 10 percent

Earnings of 10 percent, less the cost of 2 percent, could produce a net cash flow to the state of 8 percent on $50 billion, or $4 billion per year. That cash flow could fund crucial economic activity, from education to infrastructure to developing new value-added processing and manufacturing.
Rogoff could've performed a public service by informing citizens where they can find predictable earnings of 10% per year.  Corporate junk bonds aren't at that level.

Rogoff did not mention where Alaska would get this level of return.  Might it be private equity underwriters and hedge funds?  Besides her marriage to a Carlyle Group co-founder Alice Rogoff Rubenstein is a Senior Advisor to Pt Capital, an Arctic based private equity underwriter (PEU).  Pt Capital's website stated:

Pt Capital, LLC is a private equity firm concentrating on investment opportunities in the Arctic, including Alaska, Iceland, Greenland and northern Canada. Founded in 2013, Pt Capital team members are key to our success. Our team’s vast experience ranges from Arctic and global investing to policy and regulatory experience within the State of Alaska and the Arctic nations. The combined global investment experience coupled with the intense localized knowledge provides Pt Capital a substantial competitive advantage to a unique and emerging region of the world, The Arctic.

Investment in the Arctic may be in excess of $100B * over the next decade, largely in the development of natural resources, services and support, and infrastructure. 
The state will need someone to invest their borrowings, should they come about.   Publisher Alice Rogoff Rubenstein has two potential conflicts of interest pushing the borrow to invest public thesis.  Alaska has the best news money can buy.

Update 4-12-14   Alaska Dispatch News reported Landmark Aviation's purchase of ERA Group's FBO operations in Alaska.  Rogoff Rubenstein's paper made no mention of The Carlyle Group's two time ownership of Landmark.This isn't the first time a Landmark deal stayed beneath the radar.  Darkness is involved.

Update 8-15-19:  It turns out daughter Gabrielle Rubenstein is also a co-founder of Pt Capital in 2013.  Add another layer of conflict for when Rogoff was publisher