By Victoria Klesty and Terje Solsvik
OSLO (Reuters) -Norway's $1.5 trillion sovereign wealth fund, the world's largest, should include private equity investments in its portfolio, allocating up to $70 billion, the country's central bank recommended on Tuesday.
The Norwegian finance ministry in March asked the executive board of Norges Bank, which manages the fund, to assess whether unlisted shares should be added as an asset class.
"Interest rates have gone up, which has made it more difficult for these companies to access capital... and it has become more difficult to sell the companies they own to the stock market," the fund's CEO Nicolai Tangen told Reuters.
"The IPO activity level is fairly low, and that makes me think the timing for this could be rather nice," he added.
Some 3-5% of the fund's assets could gradually be moved to private equity funds, equivalent to between $40 billion-$70 billion, the central bank said in a statement.
A final decision will be made next year by parliament. It has previously rejected requests by the fund to move assets into private equity, arguing it could be too costly and would hamper the ability to judge its performance on an ongoing basis.
The fund, which invests Norway's surplus oil and gas revenue abroad, is the world's biggest single stock market investor, owning some 1.5% of all globally listed shares, and has stakes in more than 9,200 companies.
"Norges Bank considers it a natural evolution of the investment strategy for unlisted equity investments to be permitted on a general basis," the central bank wrote in a letter to the finance ministry.
"A broader investment universe will provide more investment opportunities and help the fund benefit from a larger share of global value creation than today," it added.
The fund would invest via private equity managers who mainly focus on developed markets in Europe and North America, Norges Bank Governor Ida Wolden Bache said.
At the end of September, 70.6% of the fund's assets were invested in listed stocks, 27.1% in fixed income, 2.2% in unlisted real estate and 0.1% in unlisted renewable energy infrastructure.
By way of comparison, the ten largest investors in private equity had an average of $80 billion invested at the end of 2022, Norges Bank said.
The fund in 2018 sought permission to acquire unlisted shares via private equity funds or by investing alongside such funds, but the then-government rejected the proposal, arguing it would impede transparency and drive up asset management costs.
But in 2022, a government-appointed commission again raised the topic of private equity, arguing that this could allow the fund to invest in promising companies at an earlier stage and thus potentially earn higher returns.
The size of the unlisted stock market has grown relative to listed shares, making up 9% in 2022 against 4% in 2017, and there has also been a positive development among unlisted companies' openness and accountability, Bache said.
"The development since 2018... has strengthened the argument in favour," Bache added.