Buyout funds outperform public equities, Norges Bank Investment Management says

Buyout funds have "meaningfully outperformed" listed equities by an average 3 to 4 percentage points annually, although performance across other private equity strategies is highly dispersed and depends on timing and manager selection, Norges Bank Investment Management said in a discussion note.

The in-house manager of the 15.3 trillion Norwegian kroner ($1.43 trillion) Government Pension Fund Global, Oslo, in January recommended to Sweden's Ministry of Finance that the sovereign wealth fund should be allowed to invest in private equity. A spokesperson confirmed that the sovereign wealth fund currently has no investments in private equity.

The spokesperson said discussion notes provide analysis that may form relevant background for NBIM's investment strategy and advice to the ministry. NBIM has been asked to assess whether the fund should have a mandate to invest in private equity and give advice on the matter to the ministry by Dec. 1, she added.

To shed light on the topic, NBIM is holding a seminar about private equity Sept. 14, according to a notice on its website. The seminar program features professors and money managers, as well as representatives from NBIM, and the notice links to the private equity discussion paper, also published Sept. 14.

In its note, NBIM examined how the market has grown over time and reviewed academic literature, comparing private equity funds to listed equities.

The manager compared private equity fund cash flows to identically timed investments in listed equities. While buyout funds have "meaningfully outperformed public equities" on an annual basis and net of fees, NBIM found that venture capital funds and growth equity underperformed by 1 to 2 percentage points on average.

The manager said its findings on buyouts align with other studies that rely on different performance measures and datasets, "and we continue to find excess return after accounting for market risk and other risk factors. NBIM's findings on venture capital, however, are in contrast to some of the academic literature, but it said "likely depend on the sample period studied. Recent venture capital performance looks more positive," the note said.

NBIM said "performance is highly dispersed and depends on strategy, timing and manager selection. Consequently, the implementation of private equity and choice of private equity funds requires careful consideration from investors."

Private equity assets under management have increased more than 12% annually since 2010, to $7 trillion, NBIM said. Fundraising has risen in line with AUM, while private equity allocations among investors have growth to more than 7% on average. Among GPFG's peer group, the average share is over 9%, NBIM said.