Side Letter: PE’s next LP giant? West Virginia’s PE target; Francisco’s carve-outs

Norway's $1.3 trillion sovereign wealth fund could become private equity's newest participant. Plus: West Virginia Investment Management is the latest US institution to earmark more capital for private markets and Francisco Partners spies an opportunity in corporate carve-outs. Here’s today's brief, for our valued subscribers only.

Just happened

Norwegian landscape in North Europe

A thawing appetite for PE
Norway’s gargantuan sovereign wealth fund is once again toying with the idea of investing into unlisted equities. In a Friday letter to the Norwegian Ministry of Finance, Norges Bank Investment Management, which manages the NKr12.9 trillion ($1.3 trillion; €1.2 trillion) Government Pension Fund Global, noted that an increasing share of value creation is taking place in the unlisted market and called for an investigation into whether such equities should be included within GPFG’s investable universe.

“In large developed markets such as the US, the UK and the euro area, the number of listed companies has long been in decline,” it added. “Companies listing are also older and larger than before. These trends may mean that the fund misses out on an increasing share of companies’ value creation.”

As things stand, GPFG’s portfolio comprises public equities, fixed income, unlisted real estate and unlisted renewable energy. This isn’t the first time it has been linked with a possible entry into private equity: in 2017 the country’s ministry of finance convened a panel to investigate whether the fund should be granted permission to invest in PE and concluded that such a move would bolster returns. The notion was ultimately rejected.

As Private Equity International noted at the time, GPFG’s entrance to the asset class could have seismic implications. Even allocating a relatively modest 5 percent to PE over the space of several years would mean deploying approximately $65 billion. Investing at that scale would likely require a diverse mix of fund commitments, co-investments, directs, separately managed accounts, secondaries, and more. So, will this time be different for our Scandinavian friends and herald their entry to PE? We’d love to tell you yes, but we suspect not. With rising interest rates and some LPs telling us fixed income is looking like a more attractive bet with lower risks, GPFG’s entry to PE may not be around the corner just yet.

Mountains more PE, mama
While we’re on the subject of piling into the asset class, another US state pension has given itself more breathing room in private markets. The $22.9 billion West Virginia Investment Management Board has approved a 5 percentage point increase to its target private markets allocation, our colleagues at Buyouts report (registration required). The hike comprises a 2 percentage point increase to PE and real estate, respectively, and 1 percent to private credit. It comes at the expense of public equities.

West Virginia’s decision echoes similar moves from New York state and the Illinois Municipal Retirement Fund, as Side Letter noted last week. Major portfolio decisions at public institutions can take months or even years to get approved. GPs will no doubt be hoping that West Virginia, New York and Illinois are simply the first movers when it comes to securing more leeway to invest in private markets, and that more will follow suit in due course.


Carving out a niche
Francisco Partners is on the hunt for carve-out opportunities this year as companies increasingly look to offload assets, our colleagues at PE Hub report (registration required). “The current challenging macroeconomic environment coupled with corporates that are focused on how they can improve shareholder value (eg, slimming down portfolios and/or refocusing strategy) will result in a lot more divestiture activity,” said Francisco partner Justin Chen. “We are having a lot of these conversations across the landscape.”

Though Francisco is unlikely to be alone in eyeing carve-outs, the firm does have pedigree: it has executed 50 such transactions since 1999. Among its most recent was the majority acquisition of Chicago-based software business bswift from CVS Health. As economic conditions look set to sour further, PE firms may increasingly find joy looking for reasonably priced assets from motivated sellers that carry heightened potential for operational improvement and value creation.

Superfund sustainability
Australian superannuation fund HESTA has committed another $200 million to a sustainable PE programme managed by the UK’s Stafford Capital Partners, per a Monday statement. The Hesta Sustainable Capital Investment Trust, which now stands at $450 million, makes co-investments in lower-mid-market unlisted businesses around the world that contribute to at least one of the UN Sustainable Development Goals. Its commitment came from HESTA Sustainable Growth, an investment option for superfund beneficiaries that targets ESG-related companies. “By focusing on co-investments and GP-led transactions, our programme offers unique and cost-efficient access to lower-mid-market private equity businesses that meet long-term sustainability goals,” Stafford partner Kurt Faulhaber said in the statement.

Climate-related investing is rapidly climbing the LP and GP agenda in Australia, which has found itself increasingly on the frontlines of the global climate crisis. You can read more about this push here.

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

10 January

11 January

12 January

13 January

Today’s letter was prepared by Alex Lynn with Adam LeCarmela Mendoza, and Madeleine Farman.