Norway Wealth Fund Could Invest $70 Billion in Private Equity

Norway’s wealth fund of US$1.5 trillion (RM7.01 trillion), had recommended to include private equity in its portfolio. The recommendation was made to reflect a broader shift among sovereign funds and large pensions to diversify beyond public assets. Ida Wolden, Norges Bank Governor, had said that the unlisted market has an increasingly larger share of global value creation. He further said that such an opening generally merits higher returns for the funds over time. In addition, the expectation for transparency and responsibility would be met by investing in unlisted equities.

Norway Wealth Fund’s Request to Consider Adding Unlisted Companies to its Existing Portfolio

The Finance Ministry was asked by the wealth fund, which owns about 1.5% of listed stocks globally, on numerous occasions to consider adding unlisted companies to its existing portfolio of bonds, stocks, real estate, and renewable energy infrastructure. Citing concerns over management costs as well as transparency, previous governments had declined to include funds in the global private equity market.

In a letter sent to the ministry, the wealth fund said that, in the same way as the “fund’s existing unlisted investments”, regulating investments in unlisted equities is attainable. Furthermore, If the approval is provided, the fund would target a gradual build up of a portfolio of unlisted equity assets as well as to seek to limit expected relative volatility to abstain from the increased risk of equity market.

The letter also said that an unlisted equity portfolio of 3 to 5% of the fund or about US$40 billion to US $70 billion at the fund’s current value, ensures an advantage of benefits of the fund’s size and regulates diversification adequately, which on comparison, is less than the 10 largest private equity investors, averaging US$80 billion.

Requests by the Previous Governments to Consider Unlisted Equities

Earlier in March, the Central Bank that oversees the fund was asked by the government to examine various aspects for further consideration of unlisted equities. The feedback will be considered along with the input from Parliament to assess the issue by the Finance Minister Trygve Slagsvold Vedum; with a probability of the final decision to be announced on annual white paper early next year.

Citations by the Wealth Fund

Nicolai Tangen, the fund’s Chief Executive Officer, spoke to lawmakers in April, citing examples of other large investors with holdings in unlisted companies, including Canada’s pension fund as well as Singapore’s Temasek Holdings. The fund published a note in September stating that since 2010, assets under management by private equity have consistently shown growth of 12%. In addition, leverage buyouts had particularly outperformed public equities on average by 3% to 4% on an annual basis.

Comments Given by Analysts and Experts

Wolden Bache and Tangen said in a letter that they would invest primarily in mid-sized and large buyout funds if the fund is permitted to invest in unlisted equities. They further said that this would assist in developing good relationships with a few selected partners. Joseph Baratta, Blackstone Inc’s Global Head of Private Equity, said that elsewhere in the world, funds similar to Norges Bank Investment Management would invest anything between 8% to 30% of assets in private equity. He added that new opportunities would be offered by the sector to influence the means of tackling sustainability goals by companies, which is the key priority of the fund.

Some analysts counterpoint that without offering substantial higher risk-adjusted returns, private equity adds additional costs. According to Karin Thornburn, a Finance Professor who teaches at the Norwegian School of Economics as well as the Wharton School of the University of Pennsylvania, said that the lawmakers would be better served at resetting the 70-30 split of the stocks publicly listed to fixed income if they’re aiming to diversify the portfolio that results in higher returns.

Thornburn, in an interview, had said that the success of the oil fund is based on disciplined investing, holding a broadly diversified at a low cost. Since the passive index strategy adopted by the fund has now become the gold standard of investing, Thornburn questioned the need for changing a successful concept without any good reason.