Norway’s sovereign wealth fund has laid out a detailed plan for the long-mooted idea of adding private equity to its portfolio, envisaging a $40bn to $70bn (€37bn-€64bn) allocation to the asset class in 10 years’ time.

Norges Bank Investment Management (NBIM), which runs the NOK15.6trn (€1.33trn) Government Pension Fund Global (GPFG), replied to the government’s request in March for analysis on potentially investing in unlisted equities, saying: “Norges Bank’s advice to the Ministry of Finance is to permit the GPFG to invest in unlisted equities on a general basis.

“The fund’s investment strategy has evolved over time, and the principle of broad diversification is an important starting point,” wrote Ida Wolden Bache, Norges Bank governor, and NBIM’s chief executive officer Nicolai Tangen in yesterday’s 8,500-word letter, which was published today.

With the unlisted equity market having grown rapidly in recent years and now accounting for an ever larger share of the global market portfolio, they said the central bank’s executive board considered allowing unlisted equity investments to be “a natural evolution of the fund’s investment strategy”.

“A broader investment universe will provide more investment opportunities and help the fund benefit from a larger share of global value creation,” Wolden Bache and Tangen wrote.

Speaking at a press briefing this morning, Tangen said current market timing for an initial build-up of private equity investments by the fund – which so far has permission to invest in listed equities and bonds as well as unlisted real estate and renewable energy infrastructure – was very good.

“This is not a reason why we are recommending anything, but I think it is a really good point in time,” he said.

Many private equity investors want to sell right now, but that was difficult, he said.

“This means that we can probably come in on the same terms they have, and now that we are thinking of phasing it in over a longer period, one will probably be able to buy on the secondary market at a discount,” the CEO said.

This could turn out to be a good buying opportunity for private equity in the same way as the financial crisis proved to be when the SWF benefited from cheap prices on the listed market to expand its equities allocation, he said.

NBIM eschews the idea of investing directly in individual unlisted companies, saying it will – if given the go-ahead by the government and parliament – invest in and alongside private equity funds with large and established managers in developed markets in Europa and North America, and limit ownership stakes to 15%.

According to the plan laid out, NBIM will target an unlisted equity portfolio of 3-5% of the fund, corresponding to between $40bn and $70bn at the SWF’s current value – a level that would probably take a decade to achieve, it said.

This would put NBIM among the world’s 10 largest private equity investors, as the Oslo-based manager said the current top 10 such investors averaged $80bn of exposure.

In the start-up phase, reported results were likely to be negative, the Norges Bank leaders warned, as a consequence of private equity funds’ investment model.

“Norges Bank will consider investing in the secondary market during the start-up phase,” the pair wrote in the letter.

As for the number of staff that would be needed to work on the hoped-for unlisted equities operation, NBIM said it anticipated around 10-15 employees working on this in the early phase, and about 20-30 in the longer term, with most of these being investment staff.

New recruitment would be necessary, it said, but the plans do not include carving out a separate unit for unlisted equities.

Read the digital edition of IPE’s latest magazine