Norwegian SWF ❤️ private equity

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Like a kid thinking it can nag its parents into submission if it just asks for candy enough times, the Norwegian sovereign wealth fund is once again asking if it can invest in private equity.

From a letter written by Norges Bank Investment Management to the Norwegian finance ministry this freezing Oslo morning, with Alphaville’s emphasis:

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 goal for the management of the fund is the highest possible return after costs. Analyses of historical returns indicate that investments in private equity could give higher returns after costs than listed equities in the long term. The fact that the GPFG is a large, long-term and well-reputed investor gives reason to expect a higher net return than for the average investor in private equity.

This isn’t NEW news. NBIM — which manages the $1.4tn “Government Pension Fund Global” — has asked multiple times before to be allowed to invest in private equity; from the top of our heads in 2005, 2010 and most recently 2018.

Each time the Norwegian government/parliament has nixed it (though the share of public equities has been lifted sharply over the years, and up to 7 per cent of assets can be invested in real estate and 2 per cent in renewable energy infrastructure). Private equity is for a variety of reasons a controversial issue in a strongly social-democratic country like Norway and for a remarkably transparent fund like NBIM.

The current consultation has been in the works for a while, moreover, and was widely expected to produce yet another request for NBIM’s investment mandate to be widened to include private equity. Even internally, people have joked about how Nicolai Tangen — the fund’s chief executive — is very clear on what way he wanted the recommendation to go. This is about as much a surprise as a verdict in a Soviet show trial.

However, this time political assent seems a bit more possible (if not probable), which makes it more intriguing than past requests.

Tangen has the reputation of being smart, politically savvy and gregarious, and has likely been preparing the ground for this recommendation ever since he took the job in 2020. And it’s true that NBIM’s shunning of private equity (and other alternatives) is pretty much unique among similar large pools of capital.

But (for a host of reasons that Alphaville plans to get into more thoroughly in a future post) Norway’s parliament should probably once again kibosh any moves into private equity.

To tide us over, here’s what Oxford university’s Ludovic Phalippou — not a big fan of the private equity industry — acerbically predicted that NBIM would say ahead of the recommendation:

Dear board,

We have been begging you (and parlement) for fifteen years now to let us invest in PE. We really want it. Obviously. The first time you said no, we went around this by investing alongside PE funds in companies pre-IPO. It was not really a success, so, just let us do the reel thing. It is true that if we had invested 15 years ago, we would have allocated to the largest PE funds, and thus mostly US LBO funds and the performance of these funds has +/- matched that of any US stock index one can come up with over the same period. But we forgot to include this slide. Instead, we show you what the PE sales people told us. They obviously know best. If you compare all PE funds (but exclude those investing in industry like oil and gas, real estate broadly defined . . .) AND you compare to the return of the worse performing broad stock index in the world (MSCI world) then PE performed much better. And it is even more alpha if you take out dividends from MSCI as some sales people do. Yes, if you adjust for some kind of risk (Beta above 1) this spread quickly diminishes to zero but PE sales people said that this leveraged equity strat is not risky. I know you think that getting evidence from these sales guys is like asking Philip Morris about evidence on the effect of tobacco on health, but, just like PM, these guys know best their industry. It is true that a recent academic study show that PE consultants are no better than a monkey for fund selection and access. We did not ask for any such evidence from these sales people but we believe these consultants are good people. And also everyone invests in PE, so why would we deprive the people of Norway from the joy of paying 700 basis points fees in order to enjoy these amazing returns. Plus the numbers above are past performance and what matters is future performance. Sales people said that expected returns in PE are projected (by them) to be the highest of any of the cheaper asset class. You get what you pay for. So, please let us. The people of Norway, and incidentally all PE fund managers and sales people, will be immensely grateful.

Truly yours
The team