Norwegian Sovereign Wealth Fund Eyes Asset Class

The giant Norwegian Government Pension Fund Global is considering its first foray into private equity, part of a continuing movement by sovereign wealth funds into the asset class.

Norges Bank Investment Management, Norway’s central bank and manager of the Government Pension Fund Global, is assessing opportunities for the fund to invest in private equity and infrastructure within a new investment program aimed at environment-related investment opportunities. It will issue its recommendations this fall. With around NOK2.6 trillion ($457 billion) under management as of Dec. 31, 2009, the sovereign wealth fund manages one of the largest pools of capital in Europe.

The Norwegian Ministry of Finance last year outlined plans for the establishment of the environmental program, saying that about NOK4 billion would be invested in environment-related opportunities in 2010. The total allocated to the program is predicted to reach as much as NOK20 billion over a five-year period.

Sovereign wealth funds are a growing source of capital for private equity funds. Total assets under management of all sovereign wealth funds stand at an estimated $3.51 trillion, representing a nine percent increase from one year ago, according to The 2010 Sovereign Wealth Fund Review published in March by alternative asset data provider Preqin. More than half of sovereign wealth funds (55 percent) are known to invest in private equity, 51 percent in real estate, 47 percent in infrastructure and 37 percent in hedge funds.

Prequin research also finds thay another 5 percent are considering setting a maiden allocation to the asset class. Along with the Government Pension Fund Global, Emirates Investment Authority, the first sovereign wealth fund for all seven states of the United Arab Emirates, anticipates making an allocation to private equity in the future. Bahrain Mumtalakat Holding Company, which currently only makes direct investments, has also been considering an allocation to private equity funds. Expect a decision in the first half of this year.

Of those sovereign wealth funds that invest in private equity, 92 percent have a preference for buyout funds, according to Preqin. In recent years, a number of the largest known fund commitments by sovereign wealth funds have gone to buyout funds. Examples in the Preqin report include SAFE Investment Company’s $2.5 billion commitment to U.S. buyout fund TPG Partners VI and China Investment Corporation’s $3.2 billion commitment to CIC-JC Flowers Financial Assets. China Investment Corp. also recently backed European buyout house Apax in an innovative two-part transaction that saw the sovereign wealth fund acquire a 2.3 percent stake in the buyout shop for an undisclosed sum and also purchase a stake in Apax Europe VII, the firm’s 2007-vintage €11.2 billion fund ($15.1 billion).

Nearly two-thirds of sovereign wealth funds investing in private equity funds are also known to seek investments in venture funds, according to the Preqin report. Ireland’s National Pensions Reserve Fund aims to have 15 percent of its private equity portfolio invested in venture capital. The sovereign wealth fund also allocates 20 percent to 25 percent of its private equity portfolio to investments to special situations funds, including distressed debt and turnaround vehicles.

As part of its growing focus on alternative assets, the Norwegian Ministry of Finance also recently announced that up to 5 percent of the Government Pension Fund Global would be invested in real estate, or about NOK130 billion, at the expense of bond investments.

The Government Pension Fund Global is a sovereign wealth fund into which is deposited the surplus wealth produced by Norwegian petroleum income. The fund changed its name in January 2006 from The Petroleum Fund of Norway. Norges Bank Investment Management forecasts that the fund will reach NOK2.8 trillion by the end of 2010 and NOK4.8 trillion by the end of 2014.