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PE in Fashion and Demand Amongst The Top Sovereigns

The beginning is the most important part of the work.

   Plato, The Republic


It has always been a matter of personal choice how to kick off on the 1st (or maybe 2nd) of January after all the indulgences of the festive season: some go out for a brisk 20K Nordic ski run to build on their New Year’s resolution and some desperately search for aspirin and Alka-Seltzer to wrestle away a nudging hangover. Always has been – always will be. However, I find that the same is true for the financial industry. Often the early moves and statements by the industry’s heavyweights significantly define what to expect from the next 12 months.

We are still waiting for the data for 2017 emerging markets private equity to be published, but it would seem that the industry would reflect on it as a rather confusing year with distinctly mixed performance and fund raising in the asset class. As such, it has been particularly interesting for me to learn of the news that NIBM (Norges Bank Investment Management) has put a proposal to the Norwegian Finance Ministry to allow Norway’s $1.1tn oil fund to invest in unlisted companies.

In a letter of 29 June 2017, Norges Bank asks to consider whether the investment universe for the fund should be expanded to include investments in unlisted equities. This would allow Norway’s $1.1tn oil fund to invest in private equity funds. Currently the fund is allowed to invest in listed companies only and buy stakes of less than 10 per cent. The fund has requested that it should be given permission to own more than 10 per cent of an unlisted company, as it is allowed to do with unlisted property investments.

Even though the sovereign fund has become one of the world’s largest investors, owning on average 1.5 per cent of every listed company in the world, it is still seeking new ways to boost its returns by exploiting its long-term investment view, and is now considering Private Equity as one of these options. It is particularly pleasing to read that this superinvestor argues that the structure of listed capital markets does not offer adequate access and exposure to the economy and some industries and geographies can only be accessed through investments into unlisted vehicles. This is particularly true for Russia as well as other emerging markets. 75% of the main Russian stock indexes (RTS and MSCI Russia) represent oil, minerals and the financial sector. However, it is clear that the national economy is much more diversified then this. And actually the latest research suggests that the overwhelming majority of the most dynamic and exciting companies does not come from these sectors, and, evidently, most of these companies are not listed.

And with the suggested 4% maximum allocation into the asset class, if approved NIBM will potentially become one of the largest global investors with up to USD 40 bln of dry powder in its coffers.

If this indeed proves to be a sign of an emerging trend for western sovereign funds to follow the lead of their Asian and GCC counterparts to allocate and invest substantially in Private Equity, we are in for a hell of ride in 2018.

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