The Side Letter: Norwegian should

At the moment, a pair of professors are considering the future of the world’s largest sovereign wealth fund, Norway’s Government Pension Fund Global.

Specifically, Trond Doskeland at the Norwegian School of Economics and Per Stromberg at the Stockholm School of Economics are assessing whether the NKr7.8 trillion ($1 trillion; €830 billion) fund should be allowed greater freedom to invest in private equity.

They are not due to make their recommendations to the Ministry of Finance until December, but in September Yngve Slyngstad, the chief executive of Norges Bank Investment Management, hinted at the outcome in an interview with Bloomberg: alternatives will be off the menu.

“It would be such a small proportion, and the duration of implementation would be so long, that if it were to have an impact on returns, it would in reality be if the fund was going down in size,” he said. NBIM, the manager of the fund, had nothing to add to those comments when approached by Private Equity International.

Some investors in the asset class will breathe a sigh of relief. After all, the large end of the market – where an investor of this size would likely gravitate – has seen five times more money raised than invested in the last five years. More capital will exacerbate the situation. But is it really a simple case of mo’ money, mo’ problems for the asset class?

A back-of-a-napkin calculation suggests that the Norwegian fund could access the asset class without creating too many ripples. If a trillion-dollar investor wants to allocate 5 percent – $50 billion – to private equity over the course of seven years through fund investments, it would account for a little over 1.6 percent of the market per year, based on the last three years’ fundraising. This would assume no co-investment, no investment through secondaries, and PE only (no private credit or infrastructure). In terms of its impact on the investable universe, “how would this differ from what they own in listed stocks?” asks Cyril Demaria, head of private markets for consulting firm Wellershof & Partners.

Or as another source joked, referencing the arrival of other similarly sized investors into the market like Japan’s Government Pension Investment Fund: “What’s one more, eh?”

Turning to the fund itself, Slyngstad’s comments point to a conclusion that essentially the fund has missed the boat; it is now too big to bother. This does not seem rational. Yes, it would and should take a long time to implement a private equity strategy of this scale responsibly, but as a fund whose mission is to safeguard and grow assets over generations, it has time on its side.

There is also a question of diversification. Norway’s GPFG generated a return of 6.9 percent in 2016 with a portfolio of equities (63 percent), fixed income (34 percent) and a small amount of real estate (3 percent). Diversification is “the number one free lunch in investing”, says one private equity advisor. It seems bizarre that the fund would not tuck in.

It is possible that GPFG’s reluctance to dip into private markets is less about returns and more about politics or ESG. The fund described its first direct investment, which was in CVC Capital Partners-owned motor racing franchise Formula 1, as “a mistake” in 2013 when the company became mired in corruption allegations. Perhaps the experience has caused the fund to shy away from private investments.

Whatever reasons are dissuading GPFG from investing in private equity, being too late to the party should not be one of them.