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May 2024
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PE Panorama: Norway sovereign wealth fund’s private equity hopes dashed

private equity
By Paul Mackintosh   
April 22, 2024

Norway’s US$1.6 trillion sovereign wealth fund, the Government Pension Fund Global (GPFG), has again been met with an official ‘no’ to its wishes to invest in private equity, albeit not a categorical one.

Norges Bank Investment Management, which manages the wealth fund, had applied once again to invest in private assets, but the finance ministry opted instead to establish a permanent expert panel later in the year to evaluate the issue.

The ministry said in a statement announcing the decision that previous analyses “indicate that private equity fund investments have achieved a non-negligible excess return net of costs” compared with public equity markets. “However, it is challenging to measure and analyse risk and return for such investments. The analyses are sensitive to the choice of methodology, and the findings vary widely between different studies.”

In addition, “private equity funds charge very high fees. Although there may be a high excess return net of costs, high fees may in themselves have a negative impact on the legitimacy” of the wealth fund.

It’s hard to argue with those conclusions, which have the virtue of being objectively true. Plus, thanks to favourable developments in the equity market, the ministry could quote a return for 2023 of 16.1%, well above most pension fund targets worldwide. So it’s hardly under pressure to make structural changes on performance grounds.

With fundraising globally slowing down, private equity managers might do well to consider the Norwegian government’s position, although I doubt they will change their structures. As much as the high fees are an issue, the lack of sufficient transparency to justify those fees probably is even more so. That is particularly an issue when the investor is publicly accountable, like just about every public pension fund worldwide.

At least with so many portfolios being sold off, the GPFG, if it ever gets the green light, may be able to stock up on good assets at a discount, although it might be asked why it’s in a hurry to get into an asset class that so many limited partners are bailing out of.

It’s also hard to fault the government’s decision to form a permanent expert panel, even if it smacks of kicking the can down the road. Private equity is an asset class that benefits - at least on the LP side - from having more knowledge and brainpower applied to it.