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Sovereign Wealth Funds

Norway’s sovereign wealth fund eyes private equity investing

The Government Pension Fund Global, Oslo, should be permitted to invest in private equity, recommends its money manager.

In a letter to the Norwegian Ministry of Finance, Norges Bank, which runs the assets of the 8.5 trillion Norwegian kronor ($1.1 trillion) sovereign wealth fund, wrote that "the risk associated with unlisted equity investments could be adequately constrained in the management mandate."

Should the ministry permit investment in private equity, Norges Bank "will approach investment opportunities and build expertise gradually, invest via and alongside others in a responsible manner that safeguards the fund's ownership interests, and share relevant information with the public," according to the letter. A detailed investment strategy would be set out by the executive board of the manager at a later date, based on further analysis of opportunities. "The bank will invest only if we believe there is reason to expect these investments to help improve the trade-off between risk and return in the fund as a whole. A broader investment universe will thus not automatically mean that the bank actually invests the fund in unlisted equity," said the letter.

The ministry asked Norges Bank on June 29 to consider whether the investment universe for the sovereign wealth fund should be expanded to include private equity. The letter, which is signed by Norges Bank Gov. Oystein Olsen and Yngve Slyngstad, CEO of Norges Bank Investment Management, also said that NBIM will consider investing in or alongside private equity funds, adding that "such a strategy will require the bank to have good manager evaluation skills."

Any investment in private equity will see NBIM "give priority to establishing cost-effective solutions." The need to hire staff to invest in private equity "will probably be limited at first" because of the anticipation that initial investments will be made through private equity funds.

However, the letter also acknowledged that it is "reasonable to expect total management costs to rise slightly because the direct management costs for unlisted investments are generally higher than the equivalent costs for listed investments. When investing in funds, we have to expect to pay both a fixed management fee and a variable performance fee." NBIM currently caps total fees paid to external managers. The letter said consideration will be required regarding adapting this cap for private equity investments. "Co-investments will contribute to lower average management costs than if the fund's investments in unlisted equity are exclusively in private equity funds. Investors are not normally charged management costs for this kind of investments." While the letter added that more staff would be required for co-investment, NBIM has "already amassed competence" that it can build on via its license to invest in pre-initial public offering companies.