Is private equity actually worth it?

Last November, the $1.6tn Norwegian sovereign wealth fund asked the government for the umpteenth time if it could be allowed to invest in private equity. That’s a good excuse to explore one of the financial world’s most controversial issues.

After all, this is potentially a big deal, given the size of Norges Bank Investment Management and its status as the world’s biggest and broadest de facto index fund. The proposal is to move gradually to a 3 to 5 per cent allocation, which would mean almost $80bn — roughly the equivalent of a TPG, Warburg Pincus or General Atlantic.

But to make the effort worthwhile, NBIM would probably over time target a 10 per cent allocation (even this is about half of what many other comparable large long-term investors aim for). At the fund’s current size that would mean a $160bn slug of money — equal to the entire private equity arms of Blackstone, KKR, or Carlyle. No wonder several have been making trips to Oslo lately.

Moreover, the pros and cons of private equity have become increasingly pertinent, and hotly debated. Almost every major institutional investor in the world is investing more and more in private equity — it has become the go-to strategy for any pension plan struggling to hit its targets — but some experts argue the higher returns are a mirage, and even some insiders admit they are probably going to decline.

The Norwegian government is going to reveal its own views later this month, and then it’s up to parliament. Only 1/4 of FT Alphaville takes a special interest in anything Norwegian, and probably even fewer readers. But given the wider implications, NBIM’s desire to add private equity to its mandate is a good excuse to do a deep dive into the $5tn subject.

Private equity’s genesis moment

In October 1978 a tiny obscure investment company called Kohlberg Kravis Roberts bought Houdaille Industries, a venerable, publicly listed car parts maker that had worked on the Manhattan Project, for $380mn.

At the…