The investment universe for the Government Pension Fund – Global: inclusion of pre-IPO companies

1 February 2008

Norges Bank's letter to the Ministry of Finance of 1 February 2008

Introduction

We refer to Norges Bank’s letter to the Ministry of Finance dated 20 October 2006, where one of the proposed changes was the expansion of the investment universe for the Government Pension Fund – Global to permit investment in equities expected to be listed on a regulated and recognised marketplace within 24 months. The Ministry of Finance dealt with most of the Bank’s proposed changes in Report to the Storting No. 24 (2006-2007), but the question of investment in private equity was not covered.

In this letter, Norges Bank again proposes that the investment universe for the Government Pension Fund – Global be expanded so that investment can be made in equities expected to be listed on a regulated and recognised marketplace.

Expansion of the investment universe to include pre-IPO companies

One important element of Norges Bank’s investment strategy for achieving excess returns has been to make a large number of independent and uncorrelated investment decisions. This strategy is to be retained. In the development of the regulatory framework for the Government Pension Fund – Global importance should be attached importance to permitting additional and independent opportunities to generate excess returns. The current rules limit equity investments to equity instruments listed on a regulated and recognised marketplace. For a large and long-term portfolio such as the Government Pension Fund – Global, it is also potentially profitable to invest in companies at an early stage of their development, including the period prior to listing, and in companies which have been delisted but are preparing for relisting.

In its letter of 20 October 2006, Norges Bank argued in favour of the inclusion of private equity in general, with an upper limit of 5 per cent of the Fund’s total equity investments. As a short-term solution, Norges Bank proposed that the investment universe should include equities expected to be listed in the next 12-24 months. Norges Bank’s Executive Board approved such a change for the investment portfolio in its foreign exchange reserves in the autumn of 2006. We believe that this change should also be made for the Government Pension Fund – Global, but slightly less restrictively. Norges Bank believes that the provision should also include cases with a longer time horizon than 24 months. It is therefore proposed that the provision for the Government Pension Fund – Global should more generally include companies which have decided to have their shares listed.

Norges Bank recommends that the investment universe for the Government Pension Fund – Global be expanded such that it is permitted to hold shares in companies which have applied for, or have concrete plans to apply for, listing on a regulated and recognised marketplace. Rather than setting a time limit for when listing is expected to take place, it is proposed that the expansion should cover shares issued by companies which have decided to have their shares listed. On this point, our proposal corresponds to the wording (see below) which the Ministry has established for the Government Pension Fund – Norway.

As with all other investments in the Government Pension Fund – Global, Norges Bank will have a duty to ensure that the Bank has adequate risk systems and control procedures which capture equities not yet listed. This will also include a requirement for satisfactory valuation of such investments.

Proposed change

It is proposed that a new sixth paragraph be included in Section 4 of the Regulation on the Management of the Government Pension Fund – Global:

“The portfolio may, in accordance with the same currency and regional distribution, be invested in equity instruments that are not listed on a regulated and recognised marketplace if the company has applied for, or has concrete plans to apply for, admission to such a marketplace.”

The current sixth paragraph then becomes the new seventh paragraph.


Yours faithfully


Svein Gjedrem      Yngve Slyngstad