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Giant Norway Fund May Seek To Invest In Private Equity After All

Just two months after Norway’s finance ministry ruled that the country’s giant sovereign wealth fund had to steer clear of private equity, calling it “challenging,” the ministry appointed a new secretary general and chief adviser, Svein Gjedrem, who last year advocated for the inclusion of private equity and other non-liquid assets in the fund’s portfolio. Gjedrem started his new position on June 11.

“The fund’s investment universe should be expanded to include private equity and infrastructure,” wrote Gjedrem, a former central bank governor, in July 2010, in a note to the finance ministry. The note was also signed by Yngve Slyngstad, who heads the central bank arm that invests the fund’s assets.

Any changes to the fund’s guidelines would ultimately have to be approved by Norway’s finance minister, Sigbjoern Johnsen.

The potential shift is important because the Norway Government Pension Fund Global is so large that even a small percentage allocation to private equity could have a major impact on the industry. With assets exceeding $570 billion, the fund is one of the world’s two largest sovereign wealth funds (the other being the Abu Dhabi Investment Authority, or ADIA, whose official size is not publicly available).

The finance ministry’s previous secretary general and adviser on fund guidelines, Tore Eriksen, recently left to become Norway’s representative to the Organization for Economic Cooperation and Development, better known as the OECD. Eriksen had advised against entering new asset classes in the wake of the recent financial crisis, during which the fund lost an astonishing $116 billion.

The fund has since rebounded from its financial-crisis lows, returning 10 percent in 2010 following a 26 percent gain in 2009. The fund also has received substantial new money from the country’s oil and gas revenues, especially in light of soaring oil prices. Norway is one of the world’s top oil and gas exporters.

Advised by Eriksen, the finance ministry wielded academic research showing that because of the high fees associated with private equity, it would be difficult for the fund to garner solid earnings, especially given the extra returns that would be expected in exchange for the increased liquidity risk.

His replacement, Gjedrem, has argued however that private equity and other private assets such as infrastructure can offer an additional measure of diversification. Other sovereign wealth funds, including ADIA, have long invested in private equity and infrastructure.