The manager of Norway’s giant sovereign wealth fund is recommending the government allows the fund to extend its investment universe to include unlisted equities.

In a letter to the Norwegian Finance Ministry, the leaders of Norges Bank Investment Management (NBIM) suggested a cap of 4% on any allocation to private equity. This could amount to as much as €35bn based on the Government Pension Fund Global’s (GPFG) NOK8.5trn (€881bn) investment portfolio.

The letter – signed by Øystein Olsen, chairman of the central bank Norges Bank, and Yngve Slyngstad, NBIM’s chief executive – was in response to a request from the ministry made at the end of June for the manager’s opinion on whether the investment universe for the fund should be expanded to include investments in unlisted equity.

The pair emphasised that NBIM would only make investments if individual deals would help boost the fund’s overall risk-return profile.

“A broader investment universe will thus not automatically mean that the Bank actually invests the fund in unlisted equity,” they said.

“If the Ministry does permit unlisted equity investments, the Bank will approach investment opportunities and build expertise gradually, invest via and alongside others in a responsible manner that safeguards the fund’s ownership interests, and share relevant information with the public,” the men wrote.

They said the detailed investment strategy for private equity would be set by Norges Bank’s executive board later on, based on more analysis.

NBIM agreed with the ministry’s idea that the bank should have responsibility for deciding how much should be invested in private equity, as was the case with the fund’s allocation to unlisted real estate.

Real estate was removed from the GPFG’s benchmark index from 1 January 2017, but the asset class remains part of the investment universe, effectively allowing NBIM to decide on the allocation up to a stipulated upper limit.

NBIM said the ministry could set an upper limit for private equity too, and suggested this could be about 4% of the fund, or 6% of its equity portfolio.

This was the allocation indicated if the fund’s stake in the private equity sector were to equate to its average stake in companies included in the benchmark for equity, it reasoned in the letter.

“The Ministry could also choose to set a lower limit,” Olsen and Slyngstad added.

The pair said it would “take a long time to build up a portfolio”.

NBIM noted in its letter that other SWFs had allocated 8.5% of their capital on average to unlisted equity at the end of 2016, up from around 4% in 2000.

Back in August, the ministry appointed two expert groups to review aspects of how the GPFG invests, including one to assess whether it should be allowed to invest in unlisted equities, and the other to analyse the performance of its active management.

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