Could Norway’s $880bn Oil Fund Target Private Equity?


December 3, 2014

For quite a while now, experts have called for Norway to adopt a new investment strategy for its $880 billion oil fund. Tuesday saw the funds management team take further steps towards acting on these calls, with new asset classes such as private equity being proposed as an alternative.


Norway’s Finance Ministry asked on Tuesday for the Strategy Council, in control of the Government Pension Fund, to look whether other asset classes might be worth looking into. It is mainly focused on seeking investments in unlisted infrastructure, but private equity remains as an option.


The Fund’s Current Composition
The Government Pension Fund was set up 18 years ago and it has been running a very conservative investment strategy ever since. Under the current mandate the fund is allowed to invest around 60% in stocks, 35% in debt and around 5% in properties, although the investment percentage has remained below 5% for quite a while.


According to analysts at Bloomberg, the fund has been slow to increase its risk level. In 1998, the fund moved into investing in the stock market, and further into the emerging markets in 2000. Real estate appeared as an investment option only three years ago, in 2011.


The fund has attracted a real annual return of 3.7%, with a nominal return of 5.75% on average in the past. But experts are wary whether the fund can continue receiving 4% returns in the future.


Call for Higher Returns
Because Norway’s oil fund has been conservative with its risk approach, experts have criticised it for small returns. Earlier in September, the Norwegian government received a report asking the fund to adapt a so-called ‘opportunity cost model’.


The Financial Times wrote at the time, that this model would provide the management of the fund “to own unlisted assets such as private equity and infrastructure as long as they beat a simple benchmark, usually consisting of equities and bonds”.


Furthermore, the fund’s chief executive, Yngve Slyngstad, has asked for a mandate to start investing more in companies, even before they are listed on the stock market, essentially urging for the fund to look into private equity. Slyngstad told the News in English, a Norwegian online publication, how the oil fund was asked to invest in Facebook prior to its listing, but how they had to pass on the chance due to the current mandate.


Infrastructure Before Private Equity
Despite the interest and expert advice, the Norwegian government is set to first venture into investing more in long-term infrastructure instead of private equity. The Financial Times reported on Tuesday that an expert panel would consider whether the fund should invest in assets such as “motorways, power stations and airports”. Any new investment won’t take place until 2016.


It might be that other asset classes, such as private equity will be considered at a later point, especially if the infrastructure ventures prove successful. Finance Minister Siv Jensen said, “Developing the fund’s investment strategy through better diversification will help to ensure continued robust, long-term management of the fund.”


Private equity investments have long been attractive asset for sovereign-wealth investors and large pensions funds. Singapore’s GIC and the Canada Pension Plan Investment Board are among funds that successfully invest in private equity.



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