Norway's 8.1 trillion krone ($1 trillion) sovereign wealth fund should not be permitted to expand into private equity, the country's finance ministry ruled on Tuesday.
In a white paper submitted to the Norwegian Parliament, the ministry said the often opaque and fee-heavy asset class would be a bad fit for the Government Pension Fund, which adheres to such management principles as high transparency and low investment management costs.
Norges Bank Investment Management, the manager of the fund, had asked for permission to begin investing in unlisted equities in a January 8 letter signed by Norges Bank chief executive officer Yngve Slyngstad and Øystein Olsen, Norway's central bank governor. The finance ministry wasn't swayed by their argument that private equity would be worth the associated costs and risks.
"Unlisted equity investments may affect the reputation of the fund and challenge key characteristics of the current management model," the ministry said in its paper. "The annual cost of investing in private equity funds can be estimated at about 6 percent of assets under management."
By comparison, the Government Pension Fund's equity management costs in the listed
market are about 0.5 percent, according to the white paper. Overall costs for Norway's wealth fund are also low, measuring at about 0.06 percent of assets.
In the Norges Bank letter, Slyngstad and Olsen argued that private equity investments could offer diversification benefits as well as "slightly higher" net-of-fee returns. In addition, the sovereign fund's "size, long-term horizon, and limited liquidity needs may make it well-suited to investing in unlisted equity," they wrote.
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Financial and economic think tank Re-Define said the finance ministry's decision to keep Norges Bank out of private equity leaves the Government Pension Fund "poorly placed to benefit from the enormous opportunities offered by the rise of digitization and new technologies, most of which are not captured by listed companies."
The policy group said that Norway's Parliament should overrule the finance ministry, which it said has "inflicted a substantial opportunity cost on the fund by rejecting private equity for a decade."
While the finance ministry ruled against private equity, it said it would review the possibility of opening the fund up to unlisted infrastructure assets, at least in the case of renewable energy projects, which could be included in its green investing mandate.