Norway’s US$1.35 trillion sovereign wealth fund, the Government Pension Fund Global, could start investing in private equity, potentially funneling billions into the asset class - but even if Norges Bank Investment Management (NBIM) agrees to a government request to examine "various aspects of unlisted equities”, any deployment is likely to be gradual and conservative.

Last month, Norway's Ministry of Finance made the request in a letter to NBIM, which in recent years has slowly raised its exposure to unlisted real estate (2.7% of AUM) and renewable energy (0.1%). Although the reasons are rooted in the need to improve yield, NBIM’s return of -14.1% in 2022 was 87 basis points above the ministry’s benchmark.

In 2018, the ministry 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.

NBIM lacks significant alternatives allocation, which has supported the robust multi-year returns of its peers. Moreover, the high proportion of public equities means that the fund is prone to volatility. The US$164 billion in losses reported for 2022 were caused by the impact of higher inflation, higher credit costs and the fallout from the war in Ukraine. These were mitigated by record inflows totalling NOK1.09 trillion (US$109 billion), compared to outflows to the government of NOK119 billion in 2021. The hit to US public equities was the biggest setback for the fund, with a total loss of NOK466 billion – far worse than the NOK70 billion loss in German equities. Fixed income investments had a -12.1% return. In real estate, there was a 0.1% return on unlisted property but a 31% decline in listed real estate, leading to an overall return of -14% - out-performing the benchmark by 0.9%.

Global SWF’s research finds that while NBIM has made above average returns in fixed income and public equities over a 10-year period, 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.

NBIM has fallen well short of its ambitions in 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. It remains far short of these targets.

Nevertheless, in renewables it is showing signs of picking up pace and last month it made its third major investment in European renewable energy with the acquisition of a 16.6% in He Dreiht, a 960MW offshore wind project in the German North Sea, for EUR430 million (US$468 million). The acquisition is expected to close in Q3 and will be made together with Allianz and AIP Management as a consortium that will acquire a 49.9% interest in the project, which is valued at approximately EUR2.6 billion. German utility EnBW will retain a 50.1% stake. He Dreiht is set to come onstream by end-2025, becoming Germany’s largest offshore wind farm, suppling 1.1 million households.

The investment in Germany comes after NBIM’s acquisition in January of 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); Iberdrola retains 51%. 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.

NBIM is investing at earlier development stages. The Dutch windfarm is a mature asset, the Spanish portfolio is only partly complete and the German windfarm is still nearly three years from generating power. Investing at an earlier stage is set to lead to higher long-term returns and it appears NBIM is gradually building up momentum.

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