Norway says ‘nei’ to private equity

Woe, thy name is private equity. The Norwegian government has once again nixed the $1.6tn sovereign wealth fund’s desire to add LBOs to its investment mandate.

This wasn’t entirely unexpected, given that every CEO of Norges Bank Investment Management has at some point asked if they can invest in private equity, but been turned down by various governments. Perhaps this is just a rite of passage that NBIM’s podcaster-in-chief Nicolai Tangen had to go through.

NBIM is mostly a massive index fund, and adding private equity to the mix (in an overwhelmingly social-democratic country like Norway) was always going to be a big ask. Moreover, there were more fundamental financial issues that weighed against the decision, as FT Alphaville detailed earlier this year.

In its annual white paper to parliament on the country’s two main wealth funds — the smaller domestic Government Pension Fund Norway and Government Pension Fund Global (which is managed by NBIM) — the Norwegian finance minister instead decided to punt the private equity issue to a new committee.

An expansion to unlisted equities would entail investments that have to be managed in a manner that is substantially different from the current investment management. The Ministry of Finance therefore wishes to gather more information about both financial and non-financial aspects of such investments. The Ministry intends for a new, external expert council for the Fund, as suggested by the Sverdrup-committee, to be established in 2024. Among the new council’s assignments shall be to assess different aspects of unlisted equities.

— The Government does not wish to open for unlisted equities now. This is an important decision, and we must allow time to consider it carefully. We wish to establish an independent expert council for the GPFG, and with input from this council we will get a better decision basis and broader debate about all aspects of investments in unlisted equities, says the Minister of Finance.

(Norwegian speakers can read the full “fondsmeldingen” here. The main private equity section is 3.1)

Espen Henriksen, a finance professor at the Norwegian business school BI and a sharp observer of the SWF, told FTAV that shunning private equity was a “a very wise decision”.

The recipe for managing the Government Pension Fund Global has been broad and systematic risk diversification and economies of scale in open public markets. Private equity would have been concentrated bets and diseconomies of scale in closed private markets. It would thus have been the opposite of and a departure from what has made the management of the GPFG a success.

Private equity titans, who have been quietly courting NBIM to get some of the massive river of fees that would flow from the mooted $80bn PE allocation, might be praying that this is merely a “not now” rather than a “forget about it”.

The white paper will now be debated in parliament. At the press conference finance minister Trygve Slagsvold Vedum mostly ducked and weaved when it came to the issue, sticking to the message that there was no rush and something like this needed time to be considered. And who knows, maybe things will change.

NBIM itself said:

We think it is positive that the Ministry of Finance wants to further evaluate the option of including unlisted shares in the fund’s mandate.

 We look forward to meeting the Finance Committee in parliament later this month to answer questions on the topic.

But several Norwegian governments have set up similar (if periodic) external committees to examine the SWF’s strategy, and the attitude to private equity has always been a bit lukewarm.

Most importantly, even if this new permanent “expert council” were to recommend the addition of private equity at some point in the future, it is still hard to see how it could get past the Norwegian parliament, which would have to bless any changes to the mandate.

Still, this seems like a smart move. Never say never, etc, (even if scepticism is warranted) and having a permanent committee of external advisers and observers rather than occasional ad hoc ones could be a valuable addition to the fund’s governance.

Further reading:

– Is private equity worth it? (FTAV)