The manager of Norway’s huge sovereign wealth fund has come out with an analysis of the private equity (PE) markets, which finds that venture capital and growth equity funds – two of the three most common PE strategies – have underperformed public markets since 1985.

Norges Bank Investment Management (NBIM), which runs the NOK15.3trn (€1.3trn) Government Pension Fund Global (GPFG), this morning published the finding in a paper on PE, in which it reviewed issues such as the growth of the PE market, the value creation process, and after-cost performance.

The GPFG’s mandate does not currently permit general investment in unlisted equities, but the government is considering changing this.

In the paper, NBIM staff wrote that comparing PE fund cash flows to identically-timed investments in public equities, they found buyouts had “meaningfully outperformed” public equities by three to four percentage points annually, on average.

“In contrast, we find venture capital and growth equity have underperformed by 1-2 percentage points, on average,” they said.

The analysts said their findings on buyouts aligned with other studies in the literature that relied on different performance measures and datasets, adding that they still found excess return after accounting for market risk and other risk factors.

“Our results for venture capital contrast with some of the literature but likely depend on the sample period studied,” they said, adding that recent venture capital performance looked more positive.

The paper was published as part of NBIM’s “discussion note” series – analysis and background documents in which, it said, views expressed are not necessarily those of the organisation.

The data used in the NBIM paper to compare performance of PE funds with public markets was a sample of funds with vintage years from 1985 to 2016 where sufficient cash flow data was publicly available up to Q2 2023.

Overall, NBIM said in the paper that it found PE performance to be highly dispersed and dependent 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 analysts wrote.

Norges Bank – of which NBIM is a division – was asked by the Finance Ministry in March to investigate aspects of unlisted equities, according to the ministry’s annual white paper on the SWF.

Asked by IPE whether the discussion note formed part of what had been requested, a spokeswoman for NBIM said: “The Discussion Note series provides analysis which may form relevant background for Norges Bank Investment Management’s investment strategy and advice to the Ministry of Finance.”

The Ministry of Finance was currently assessing whether it should give the fund a mandate to invest in PE, she said, adding that Norges Bank had been asked to assess the matter and give advice to the Ministry by 1 December 2023.

Read the digital edition of IPE’s latest magazine