As a Scandinavian country, Norway has been more exposed to the private equity culture than most other countries in Europe.
And according to the latest figures from the European Venture Capital Association, Norway is slowly creeping up the European private equity rankings in overall terms.
Last year, private equity investment in Norway made up 0.154% of the country’s gross domestic product, compared with 0.143% in 2003.
This 7.7% increase placed Norway eighth in the European pecking order, up two places from the previous year. In particular it overtook its neighbour Finland, third in 2003, but ninth last year.
Within this scenario, Norwegian pension fund involvement in the sector leapt in importance.
Last year, 14.8% of private equity funds raised in Norway came from pension funds, a three-fold increase over the 4.9% of the year before. In absolute terms, the increase - from €14.8m to €75m - was even bigger.
Nevertheless, the general perception is that private equity investment by Norwegian pension funds still has a long way to go.
“Private equity has been more for the old family companies, such as shipowners,” says Caspar Holter, partner with investment and pension adviser Pensjon & Finans. “But very little has been done by pension funds. I’d say that less than 1% is allocated to private equity in their portfolios.”
One reason for this is the relatively long payback period on the investment.
“The J-curve means they lose money in the first three or four years,” says Holter. “That makes it very difficult for pension funds to invest, because there is also a legal requirement to guarantee a return of 3% annually.”
Another problem is that Norwegian pension funds are not allowed to borrow, and very often a private equity investment means they have to be responsible for loans.
“On top of that, private equity investing demands certain expertise,” he says. “Most Norwegian pension funds are small, so they do not have the relevant in-house competence. Listed equities are therefore a more practical option.”
Catrine Gjedebo, partner, Wassum Investment Consulting in Oslo, says: “Only some of the largest pension funds and life insurance companies have invested in the asset class, and then only in small amounts. Private equity has lately been more in focus as a source of alpha, but even so is still a very small asset class for Norwegian pension funds.”
Another big obstacle to widespread investing is the legal restriction which places a ceiling of 35% on equity investment. Investment in private equity is limited to 5% and is included in the 35% limit. There is also a minimum capital requirement of 8% calculated on a risk weighted portfolio.
According to Gjedebo, it is these regulations that have inhibited interest in the asset class, together with lack of liquidity, lack of knowledge on the part of the pension funds and their current risk capacity.
However, she believes the next few years may see some relaxation of these regulations. She also sees the possibility of more interest in actively managed mandates, and in private equity itself.
In spite of all the barriers to investing, a number of pension funds, including Det Norske Veritas Pensjonskasse (see case study), have been using private equity for some time.
Another is the Norsk Hydros Pensjonskasse which has been investing in private equity for 15 years, slowly building up its exposure.
“We started in order to get diversification for our investments, as well as a potential attractive return from the asset class,” says Runar Gulhaugen, head of investments of Norsk Hydros pension funds.
Norsk Hydro is an offshore oil company and also produces aluminium.
Its NOK17bn (€2.2bn) pension fund is a relatively sophisticated investor, with equities making up about 35% of the portfolio, in terms of market value. Around 20% of the balance sheet is in property, while there is also limited investment in hedge funds.
The private equity segment of the portfolio makes up under 5% of the balance sheet. It consists largely of direct interests in funds, plus one fund of funds.
Geographically, the vast majority are Nordic funds. In terms of stage of development, they are mainly buyout funds, with a very small amount in venture.
“We have focused on the Nordic region because we know that market better,” says Gulhaugen. “Some funds have been very good and some not so good. Overall, it’s been a relatively good performance, and the return has been at least as good as for listed equities. Furthermore, the main lesson we have learned is that there is a big difference between the best and the not-so-good managers of private equity. So it’s more important to pick the right ones.”
However, not all funds invest in private equity with the intention of gradually increasing their exposure.
For instance, the pension fund of the oil company Statoil, has had a small exposure to private equity for the past 10 years. Investments are made on an opportunistic basis, so the percentage held in private equity is unlikely to increase. Several Norwegian pension funds invest through Nordic specialists Storebrand.
“The driving force is the possibility of high returns, and to some extent diversification,” says Rune Holen, partner, Storebrand Alternative Investments. “However, it is typically not so important to smaller funds – and Norwegian funds are quite small. Those worth less than €300m-400m have little private equity experience.”
However, Holen says more have heard of, or are considering, the asset class compared with five years ago.
For clients wishing to invest in private equity, Storebrand has a fund of funds - Storebrand Investment Private Equity – raised annually and investing predominantly in buyouts.
This year investment will be allocated 50% to the US, 40% to Europe and 10% to Japan.
“We believe that the investment will give us 1.5 times our money back over the long term,” says Holen.
“That isn’t spectacular, but compared with stock market performance, it looks quite good.”