Norway’s Sovereign Wealth Fund Could Deploy up to $70 Billion in Private Equity Funds and Co-Investments over a Decade
Posted on 11/28/2023
Norway Government Pension Fund Global is managed by Norges Bank Investment Management. The massive sovereign wealth fund has avoided investing in private equity funds since its inception. Now because of the universe of unlisted equities is quite large and the sovereign fund continues to grow in size, the universal asset owner is thinking about doing it again.
The Norway Government Pension Fund Global is anemic to fees, but is willing to invest with private equity fund managers if it gets permission. The management mandate currently requires Norges Bank’s agreements with external managers to include a cap on fees. It is unlikely that a private equity fund will accept a limit on fees. This requirement will need to be adjusted if the fund invests in private equity funds. The SWF is likely to build expertise in co-investing alongside private equity funds, just like their SWF peers GIC Private Limited, Abu Dhabi Investment Authority, and the Qatar Investment Authority. Investors do not normally pay fees on co-investments, and investments of this kind are effective in reducing total fees in relation to invested capital. Fees as a share of invested capital will fall proportionally with the share of co-investment.
The letter states, “Norges Bank’s advice to the Ministry of Finance is to permit the GPFG to invest in unlisted equities on a general basis. The fund’s investment strategy has evolved over time, and the principle of broad diversification is an important starting point. The unlisted equity market has grown rapidly in recent years and accounts for an ever larger share of the global market portfolio. The Executive Board’s assessment is that permitting unlisted equity investments is a natural evolution of the fund’s investment strategy. A broader investment universe will provide more investment opportunities and help the fund benefit from a larger share of global value creation.’
The SWF will likely rather participate in most of the co-investments offered by the private equity fund. Norges Bank will have the opportunity to opt out of individual investments and will assess each co-investment based on the manager’s due diligence. If permitted they will build a portfolio of co-investments gradually to ensure diversification across companies, sectors, geographies, and managers. We will acquire non-controlling interests in the companies. The GPFG’s total interest in any one company will not normally exceed 15 percent.
Private Equity Allocator Giant
The analysis also details that if the Norwegian finance ministry permits investments in unlisted equities, an overall upper limit for unlisted investments could, for example, be set in the interval between 3% to 5% percent. That means at the wealth fund’s current size, a maximum of around US$ 70 billion could be allocated to private equity. This amount is around its peers. Other large private equity asset owners invest between US$ 60 billion to US$ 90 billion in private equity, after a cursory analysis by SWFI.
Likely the SWF will start off slow and have a start-up phase of investing in private equity. After this phase, the wealth fund would likely have a growth phase and a management phase. They expect it will probably take about a decade to build a portfolio of the size outlined in the letter. Norges Bank will consider investing in the secondary market during the start-up phase.
Part of translated letter reads, “There are different approaches to investment in private equity. It is important to choose an approach that fits the fund’s characteristics and our qualities as an asset manager. If the fund is permitted to invest in unlisted equities, we will invest primarily in mid-sized and large buyout funds. This will enable us to develop good relationships with a select few partners. Fund investment will give access to co-investments.
We will not invest directly in unlisted companies on our own. Direct investments would demand considerable and different expertise to that required to invest in or with private equity funds, which primarily requires competence in manager selection. Norges Bank has built up considerable expertise in evaluating external managers in listed markets since 1998 and has good experience with this.
To spread risk, we will not have interests of more than 5 percent in any one fund. Nor is it usual for private equity funds to allow individual investors to hold more than 5 percent of the funds they manage. To manage country risk, we will invest primarily with private equity funds in developed markets in Europe and North America. These mainly invest in companies in the same regions.
To ensure diversification across vintage years, we will need to invest steadily through cycles. It is the private equity manager that decides when the capital will actually be invested, and as an investor in private equity funds it is difficult to adjust the rate of investment to market conditions. To take advantage of the fund’s limited short-term liquidity needs, we will nevertheless seek to be countercyclical and contribute slightly more capital in periods when less capital is available than normal.
The letter ends, “We have presented how we believe investments in unlisted equities should be made given the fund’s characteristics and requirements for cost efficiency, responsibility and transparency. Norges Bank will build up a portfolio of unlisted equity investments gradually. If the Ministry permits private equity investments, we will formulate a detailed investment strategy and set a return target. The Executive Board will place particular emphasis on establishing principles that ensure that investments are made with recognised partners that have shown that they can create value for investors in a transparent and responsible manner. ”