Unlisted assets in the government pension fund global : can private equity and infrastructure improve the fund’s profitability and stability?

Abstract

Is the stock market overpriced? Is it time to sell? Most of the asset pricing research has been directed towards stochastic discount factors, without definitive answer. We study the case of the Norwegian Government Pension Fund Global, a large institutional investor that cannot easily undertake large strategy shifts, hindered by market depth. However, the fund can enjoy diversification benefits and seek alternative allocations. We review the Fund’s management performance and analyse two asset classes: Private Equity and Infrastructure. Private Equity describes a range of companies to be acquired but also a managerial and capitalistic structure. Infrastructure only refers to a category of real assets to be targeted, some of which are managed as private equity. Our findingsindicate that deep structural reforms are needed to enable efficient internal active management of the Fund. The buyout and growth segments of private equity could then be quickly added to the GPFG’s investment universe and invested through Separately Managed Accounts. The SMAs model provides much flexibility and can be adapted as the GPFG’s management acquires more experience and seek to internally manage the assets. Renewable electricity production is the most attractive segment within infrastructure. Internal competence could be quickly more acquired than for private equity, and the class seems suitable for SMAs. We exclude other infrastructure categories because of their exposure to political risk and return profile. Emerging markets should be included in the investment universe for both private equity and infrastructure. Despite the high level of risk linked to frontier markets, we suggest letting in the not-so-distant future the GPFG seize opportunities in these markets and review mitigation strategies proposals. Finally, we argue that the fund’s active management strategy should be shifted from asset selection towards value-adding ownership.