Bache’s Gift from the Norwegian Public

13 FEBRUARY 2024
By Richard Priestley

Expanding NBIMs empire to include private equity sounds like fun for an active fund manager. Having fun at your own cost is all well and good, however, having it at somebody else’s cost is not fair. Ida Wolden Bache has just signed off on Nicholai Tangen having fun. Unfortunately, neither of them will be picking up the bill, that’s left for every Norwegian to do.

Ida Wolden Bache has recommended that NBIM invest in private equity. The premise is based on the notion that, after costs, private equity produces risk adjusted abnormal returns. When you are an unelected bureaucrat who decides on how to spend every single Norwegian’s money you have an enormous responsibility to ensure that you know what you are doing and consequently do the right thing, morally and economically. Unfortunately, there are good reasons to believe that this is not the case. 

First, let’s deal with the economic side. There is no convincing evidence that private equity investments earn abnormal returns after fees. NBIM cite the review work of Korteweg (2023) to establish the notion that they should invest in private equity. However, they only cherry pick parts of his arguments. In a part they do not quote, Korteweg (2023) states that the returns from private equity since 2000 (that’s the last 23 years!) net of fees and adjusted for an equivalent market risk as either statistically insignificant or negative! Furthermore, Korteweg (2023) states that many other risks such as liquidity, size, growth, credit market, and potentially others, are important and notes, “when additional risks are accounted for, the net of fee risk adjusted performance of both VC and buy out is lower, in many cases insignificant and in some cases negative”.  Add on the facts that these are illiquid and opaque markets with information asymmetries and more open to problems of adverse selection and moral hazard, it seems incredulous that Bache would even consider this type of investment for a second, let alone a minute. 

Second, let’s deal with the moral side. Clearly, using NBIM’s own citations of research, there is no evidence to support the claim that forms the premise for opening for investment in private equity, namely that it will provide abnormal returns. Now, if Ida Wolden Bache was using her own money to invest in private equity fair enough. However, it is simply not morally justifiable to bet billions of kroners of other people’s money on this investment strategy when the evidence suggests it will just be costly for them. When you force other people to invest and put their money on the line and share only one 5.5millionth of the risk you need to be confident you are doing the right thing. Given the lack of evidence that private equity generates abnormal returns, its high management cost, opaqueness of the market, its illiquidity, and exposure to many types of risk, it is irresponsible that an unaccountable bureaucrat thinks it is morally fine to make a decision that is forced on all 5.5 million of us.

If NBIM is allowed to invest in private equity, Ida Wolden Bache has handed a huge gift worth billions of kroners to first, Nicholai Tangen which he can add to his empire at NBIM, and second to private equity managers around the world. This gift is being paid for by every Norwegian with nothing in return. The Norwegian public have given Ida Wolden Bache 15 trillion kroners of their money to invest, it’s a huge responsibility and extreme care should be taken when deciding what to do with other people’s money. 

It might be worth reflecting on two issues. First, is it morally right to force every single Norwegian to enrich private equity mangers and pay for Nicholai Tangen’s empire building when the evidence that it will benefit us is non-existent? Second, how have we managed to get to a stage where Ida Wolden Bache was convinced that this is the right thing to do? Where are the checks, balances, and controls that should exist to calm NBIM exuberance and desire to build an empire? Of course, being an index fund is boring, and NBIM want to do exciting things, but those exciting things are not the best for every Norwegian who has to pay for them and who entrusts their money to Norges Bank. Doing exciting things is fine, but do that with your own money, not other peoples, please.

This blog is based on an article from DN.no: Norges Banks gavmildhet på vegne av det norske folk