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Norway's oil fund pushes to invest in private equity

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The world’s largest sovereign wealth fund has recommended it be allowed to invest in private equity, in what would be a significant change in strategy.

To start with, Norway’s $1.1tn oil fund would consider investing in private equity funds or alongside them as part of a gradual approach, Norges Bank Investment Management said on Tuesday in advice to the country’s finance ministry. 

The fund is allowed to invest only in listed companies and buy stakes of less than 10 per cent. According to the advice, it should be given permission to own more 10 per cent of an unlisted company, as it is allowed to do with unlisted property investments.

Norway’s oil fund has become one of the world’s largest investors, owning on average 1.5 per cent of every listed company in the world. But it is seeking new ways to boost its returns by exploiting its long-term investment view.

Norwegian politicians are keen for the fund to start investing in infrastructure projects — particularly those that involve renewable energy — in addition to its current portfolio of listed equities, bonds, and property.

Oil fund officials have said that a big reason for investing in unlisted equities is that reluctance on the part of technology groups to float means that a large part of the market is not represented on the stock exchange. There is also unease about a drop in the number of listed companies in countries such as the US and UK.

“The fund’s size, long-term horizon and limited liquidity needs may make it well-suited to investing in unlisted equity. A broader investment universe may also enable the fund to be invested in different types of company to those that are available in the public equity market,” NBIM said in its advice.

Returns from unlisted equities were likely to be “slightly higher” than listed shares, according to historical data. 

Norway’s finance ministry will now consider the advice before publishing its own proposal to parliament.

NBIM suggested that unlisted equities could make up a maximum of 4 per cent of the fund — and 6 per cent of its equity portfolio — on the basis of having the same average exposure as to listed shares. “It will in any case take a long time to build up a portfolio,” it added.

Norwegian authorities are weighing several big changes to the fund, including whether to move its management outside the central bank. NBIM has also recommended that it sell its oil and gas investments to reduce Norway’s exposure to petroleum.

NBIM said it would make most sense to “build expertise gradually” and could work with venture funds to gain insights into new technology such as in renewable energy. It warned it would also have to examine the “reputational consequences” of investing in or alongside private equity firms.

The fund is permitted to invest in unlisted equities in one extremely limited case: when a company is expected to seek a stock market listing imminently. This led to one of the fund’s most contentious investments — it bought a stake in Formula One motor racing only for the company to shelve listing plans days later. Officials note that, for all the debate generated in Norway by the investment, the fund doubled its money.

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