A research report published this week by Norway’s sovereign wealth fund manager Norges Bank Investment Management (NBIM) found that long-term returns from venture capital and growth equity funds have underperformed public equities by 1-2% on average over the past 48 years, but its conclusions give some support for the conservatively allocated US$1.4 trillion Government Pension Fund Global (GPFG) to shift into private markets.
The GPFG’s mandate forbids it from investing in private equity. By end-June, 71.3% was invested in public equity, 26.4% in fixed income with the remainder in unlisted real estate (2.3%) and renewable energy (0.1%). The government has asked NBIM to analyse the possibility of investing in unlisted equities to raise the portfolio yield and reduce volatility caused by fluctuations in stock prices. NBIM staff did however find that buyout funds overperformed public equity strategies by 3-4%. The research, which focused on a sample of funds with vintages between 1985 and 2016, added that “Our results for venture capital contrast with some of the literature but likely depend on the sample period studied. Recent venture capital performance looks more positive.”
NBIM’s paper found private equity performance “is highly dispersed and depends on strategy, timing, and manager selection. As a result, the implementation of private equity and selection of private equity funds requires careful consideration from investors.”
The paper’s conclusions could inform the Ministry of Finance to allow diversification into private markets, although the discussion note is not necessarily NBIM’s official view. The organization has been asked to give advice to the Ministry on private equity investments by 1 December.
The Ministry previously ruled out allocating to private equity in 2018, when it said the opaque and fee-heavy asset class would be a bad fit for the GPFG, which seeks a high level of transparency and low investment management costs. It said, "Unlisted equity investments may affect the reputation of the fund and challenge key characteristics of the current management model. The annual cost of investing in private equity funds can be estimated at about 6 percent of assets under management."
The Ministry’s recent request to look again at private equity came after a letter by the Oslo-based fund to the Ministry in January which stated, “we're seeing more and more indications that a larger share of value creation is taking place in the unlisted market.” It pointed out that the number of listed companies worldwide has leveled off with the number in developed markets in decline.
The letter added, “These trends may mean that the fund misses out on an increasing share of companies' value creation by waiting until they are listed and eventually enter the fund's benchmark index. It should be investigated whether the fund's investment strategy should reflect these trends, and whether unlisted equities in general should be included in the fund's investment universe."
The move to look at private equity came after hedge fund chief Nicolai Tangen took up his post as CEO in 2020. Tangen founded his hedge fund AKO Capital in London in 2005. The fund has nearly US$21 billion held in long-only and long-short equity funds; under his contract, Tangen had to step away from AKO Capital.
At present, the fund is only able to invest in a private company if it is about to be listed, but this means the fund risks missing out, Tangen told Reuters earlier this year. He said, “Much ... of the value creation has already taken place. We want to have a part in that value creation.”
NBIM lacks a significant alternatives allocation, which has supported the robust multi-year returns of peers. Moreover, the high proportion of public equities means that the fund is prone to volatility.
Global SWF’s research finds that while NBIM has made above average returns in fixed income and public equities over a shorter 10-year period than covered by the NBIM paper, there are bigger gains to be made in private equity which returned an average of 15.7% - well above the 12.9% average return NBIM made on public equities over the decade.
Yet, NBIM has fallen well short of its ambitions in unlisted renewables and real estate, indicating the weighty fund steers like a supertanker when it comes to becoming more nimble in deal origination. In its strategic plan, NBIM is targeting a real estate portfolio of up to 5% of AUM, made up of listed and unlisted assets managed under a combined strategy. In early 2021 it set out plans to devote 2% of its AUM to renewable energy, but so far just 0.1% has been allocated to the sector.
