The Alphaville column of the Financial Times has run a deep analysis headlined “Is private equity actually worth it?”, based on the request in November by Norges Bank Investment Management (NBIM) for government authorisation to invest into private equity. NBIM manages the US$1.55 trillion Government Pension Fund Global, the world’s largest sovereign wealth fund.
With the world’s biggest now seeking to dip a toe into the asset class, it’s more than worthwhile (re)considering the headline question posed in the column.
Even in a sphere as heavily capitalised as private equity, NBIM’s entry could shift the needle for the entire industry. As the FT column points out, NBIM’s proposed allocation of some 3%-5% of its portfolio to private equity would equal around $80 billion, with a more realistic long-term allocation of some 10% pegging the amount at some $155 billion. That’s around the size of the entire private equity portfolios of even the leading Wall Street firms.
The wealth fund already owns some 1.5% on average of all the world’s listed companies. A shift in allocation by such a large and influential investor would surely make a difference.
Is such a move justified? I have said before that I consider allocating 10% or less to private equity as reasonable for almost any institution. But that comes with some important caveats. One is the argument cited by NBIM in the FT article that more and more companies are going or staying private, and there is therefore a need to capture their growth while they’re private.
However, the corollary is that more and more companies are private because more and more institutional money is being ploughed into private equity to either take them private or keep them so. That sounds more like a case that private status is good for private equity funds rather than for private companies.
Also, there’s the whole topic of the FT article. According to the column, it’s still “so hard to figure out whether private equity makes sense”. If that’s the case even for the FT and all the analysts and stakeholders it quotes, then should you be investing in it?
So much uncertainty is not an argument for a high allocation. Even more so when the information available to make an investment decision is likely to come from the people trying to get your money into their fund rather than any third party source or, God forbid, open market price discovery process.
If you are a fiduciary, you do not want to be making bets based on limited information from people who want you to make the bets with them. That certainly argues for an allocation of 10% or less in any portfolio.