by Hal Bernton for ProPublica and Nathaniel Herz, Northern Journal

This article was produced for ProPublica in partnership with Northern Journal and the Anchorage Daily News. Sign up for Dispatches to get stories like this one as soon as they are published.

Last summer, an unsettling quiet cloaked the isolated Southwest Alaska community of King Cove as the town’s economic engine — a sprawling seafood processing plant — sat shuttered.

Bunkhouses, once filled with hundreds of workers during the peak salmon harvest, were vacant. Four diesel generators that had rumbled day and night were stilled. The plant docks, once lined with boats and circled by fish-scavenging gulls, were empty.

The closure resulted from the financial implosion of the plant’s owner, Peter Pan Seafood. Some local fishing boat captains directed their ire at company leaders who accepted their seafood, then failed to pay them.

They dwelled far less on a surprising, largely silent, powerhouse investor in the plant: the state of Alaska.

The trustees of Alaska’s Permanent Fund, an $80 billion savings account whose earnings provide residents with annual dividends and help pay for government services, decided to invest more money in companies with ties to Alaska. More than $29 million went to Peter Pan, according to figures provided by the Permanent Fund’s current board chair.

The deal ended disastrously last year with the company’s liquidation, hundreds of unpaid creditors and a likely total loss for Alaskans on their investment.

A ProPublica investigation, in collaboration with the Anchorage Daily News and Northern Journal, revealed that the Permanent Fund’s leadership and its hired management firm ignored or overlooked warning signs leading up to the deal.

The management firm, McKinley Capital Management, had scant experience in restructuring private companies to boost profits — a skill set that would be essential in its Peter Pan deal.

McKinley chose an entrepreneur with troubling chapters in his career to be a business partner in Peter Pan and to help run the company. He had pleaded guilty to a federal misdemeanor criminal count in 2006 stemming from the marketing of tainted fish and was involved in another Alaska seafood processor that went belly-up months before the Peter Pan deal closed, a business failure that drew FBI scrutiny.

Amid a long-term decline in state revenue from oil, the Permanent Fund faces increasing pressure to deliver earnings. The Peter Pan venture illustrates the risk involved in seeking some of these returns within Alaska. When failure occurs, the impact is local, not in another state or a foreign country where a Wall Street firm has invested Alaskans’ money.

In King Cove this winter, the processing plant, the community’s largest generator of jobs and tax income, remains closed. City leaders are contemplating slashing a third of next year’s budget and are likely to ask the state to bail them out. Some families have already moved away, and school enrollment is down 20%.

“Events have conspired to threaten our very existence,” said King Cove Mayor Warren Wilson, in a commentary published in the Anchorage Daily News.

About $56 million from the Permanent Fund remains invested by McKinley, the firm that put together the Peter Pan deal. Its investments have ranged from a kelp processing venture to a satellite launch company that, last year, narrowly averted filing for bankruptcy. These investments — dragged down by Peter Pan — have dropped 21% in value since 2021. That is the worst three-year return of any individual investment fund shown in the Permanent Fund’s December performance report.

The seafood industry is notoriously volatile, and Peter Pan’s failure came during a difficult period. Collectively, the industry in Alaska lost an estimated $1.8 billion between 2022 and 2023, according to a federal study.

Craig Richards, a Permanent Fund trustee and former Alaska attorney general who led the effort to create the state-focused investment program, said he’s not ready to declare it a failure. A second investment firm managing a portion of the fund’s Alaska-focused investments has produced far better results than the one that bet on Peter Pan.

“This is a business risk, and sometimes when you take risks and you hold private portfolios, you’re going to have failures,” Richards said. “That doesn’t tell me there’s inherent danger in the Permanent Fund making in-state investments. It tells me that fishing is risky.”

Other trustees see it differently. In the spring of 2023, all but Richards voted to keep the $200 million in-state program from expanding. Jason Brune, the current chair of the six-person board, was one of the critics.

“We are not a training ground for Alaska investment opportunities to see if they can work or not work,” Brune said in an interview. “Our statutory responsibility is to maximize returns for the state.”

Alaskans voted to create the Permanent Fund nearly a half-century ago, when the state was awash in royalties and taxes generated by recently discovered oil. The fund grew into a portfolio of stocks, bonds, private companies and real estate that now churns out multibillion-dollar returns. The earnings finance much of state government and provide annual dividend checks that typically exceed $1,000 per resident.

Scarcely any of the money, though, is invested within Alaska. After falling oil prices slammed the state’s petroleum-dependent economy in 2015, some of the fund’s governor-appointed trustees posed a question: What if a chunk of the portfolio went to investment firms and businesses with Alaska ties?

Alaska has a patchy record of government-sponsored investment and economic development. Those efforts include hundreds of millions of dollars spent studying a hydroelectric dam that was never built and tens of millions building an Anchorage seafood plant that failed.

Two former Permanent Fund employees told ProPublica that staff members considered the proposed in-state investment plan a distraction from their mission to maximize returns regardless of geography — and that they made that position clear to board members in private.

Staffers also considered the $200 million investment that trustees proposed to be too hefty for the scale of business opportunities connected to Alaska’s small economy. (The former employees requested........

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