The world’s biggest sovereign wealth fund looks set to enter the private equity market for the first time, under the direction of former hedge fund manager CEO Nicolai Tangen.
Norges Bank Investment Management (NBIM), which manages the US$1.4 trillion Government Pension Fund Global (GPFG), has set out its blueprint for diversifying into private equity with plans to reach US$40-70 billion – or 3-5% of total current assets under management – within a decade.
According to Global SWF data, the top 10 state-owned investors – both SWFs and public pension funds – in the private equity market allocate an average of US$95 billion with the China Investment Corporation (CIC) topping the league and near US$190 billion. While NBIM’s private equity would not be even half the value of its similarly-sized Chinese cousin, at US$70 billion it would currently be placed between the Kuwait Investment Authority (KIA) and the Abu Dhabi Investment Authority (ADIA) at seventh in the league; even at US$40 billion, NBIM would be placed 17th in the world’s top allocators to the asset class.
In 2018, Norway’s Ministry of Finance rejected the idea, when the fund suggested private equity would boost returns. However, the world has shifted radically since then, with the pandemic accelerating a shift in the way sovereign funds invest towards private equity venture capital to pursue disruptive tech and innovation. At the same time, the number of listed companies worldwide has leveled off with the number in developed markets in decline with value creation mainly in private equity, which means the fund is missing out on potential yield. Moreover, the high proportion of public equities means that the fund is prone to volatility, as demonstrated last year when tens of billions of US dollars were wiped off its public equity portfolio.
Yet, there are doubts as to how the Norwegian goliath will manage this strategy. NBIM has also entered into unlisted real estate and renewable energy in recent years, but has fallen short of its own targets. While relatively small percentages would seem easy for many SWFs to manage, like a supertanker the sheer scale of NBIM makes it difficult to steer.
Proof of the challenge has come from its attempts to diversify into unlisted real estate and renewables. NBIM had set a target of 5% allocation to listed and unlisted real estate assets, with an absolute ceiling of 7% allocated to unlisted assets. Currently, 2.7% of AUM is invested in unlisted assets, but still amounting to a cool US$31 billion in 890 investments. Its listed real estate assets total US$45 billion, amounting to 3.7% of AUM.
Up to 2% of AUM can be invested in unlisted renewables, but NBIM missed the 1% target it set for end-2022 by a wide margin; at end-Q123 it had just 0.1% allocated to the sector, invested in three assets. Its most recent acquisition was in March with the purchase of a 16.6% stake in He Dreiht, a 960MW offshore wind project in the German North Sea, for EUR430 million (US$468 million). It is set to come onstream by end-2025, becoming Germany’s largest offshore wind farm, suppling 1.1 million households. In January it purchased a 49% interest in a 1.3GW portfolio of solar plants and onshore wind farms – both operational and under development – located in Spain for EUR600 million (US$653 million). Its previous investment in unlisted infrastructure was a 50% stake in the Borssele 1 and 2 windfarm off the Netherlands which it bought in April 2021 for US$1.63 billion. At the time, Borssele was the world’s second-largest offshore wind farm in operation, with an installed capacity of 752MW.
Part of NBIM’s problem in allocating billions is its risk aversion, restricting itself to Europe for renewables and only prime locations for unlisted properties. The narrowness of the market choices leave it with limited investment opportunities when deploying tens of billions of dollars. NBIM also needs extensive capacity building, since its internal teams focus almost exclusively on public markets and there is reticence in investing in GPs and external managers in alternative asset classes.
According to reports, NBIM said it will start with a private equities team of initially about 10-15 employees, reaching 20-30 in the long-term – this is well below the norm for a highly active investor with these sums to spare, but still far bigger than its current renewables team of around half a dozen employees, nearly all of whom are based in Oslo.
Without a team to match the success of peers such as Temasek and Mubadala, it seems unlikely NBIM will be pumping venture capital into startups any time soon. It is more likely to be inclined to follow the well-trodden path of other SWFs that have sought to diversify portfolios by co-investing, as well as looking to pick up bargains on the secondaries markets as private equity investors look to sell.