Norway's $420 billion oil fund is rattling the cage of some of the foreign companies in which it has invested. As a shareholder it deserves praise for putting its head above the parapet. But as a sovereign wealth fund it is treading a fine line.

Norges Bank Investment Management (NBIM) has been stung into action by a combination of domestic political pressure to account for its investments and heavy losses on some parts of its extensive external investment portfolio.

NBIM has publicly chastised Volkswagen for its plans to take over Porsche assets as part of a cosy merger between the two German carmakers. A detailed letter to VW Chairman Ferdinand Piech, published in full on its website, doesn't mince words.

The fund's list of gripes is pretty long, ranging from conflicts of interests, a lack of transparency, questionable financial and strategic logic for the deal to concerns about the treatment of minority shareholders.

NBIM's intervention may well be too late to have any effect on the outcome of the planned tie-up. Only legal action by the fund, which had a 0.35 percent stake in VW at the end of 2008, could prevent the deal.

Nevertheless, the VW letter goes further than NBIM has before in openly criticising one of the companies in its extensive portfolio of 8,000 equity investments. This is unlikely to be a one-off, as NBIM is attempting to raise its profile.

At a presentation in London last week it laid out the tools it has at its disposal for achieving its goals. These include dialogue and engagement, contact with regulators, proxy voting, shareholder proposals and legal action.

NBIM has used this to good effect in the case of Constellation Energy  where it managed to block a unit of Warren Buffett's Berkshire Hathaway from taking over the energy group by successfully postponing a shareholder meeting. And it is seeking a change in bylaws at four U.S. companies where it is demanding the appointment of an independent chairman.

A similar tactic at Sara Lee Corp resulted in a change to the U.S. consumer goods and food group's rules. On one level, NBIM should be applauded. Its actions are precisely the kind that large institutions should be taking to ensure the companies they own are governed properly. This is a duty that many shareholders failed to perform in the past.

In the U.S. activist investors such as Calpers -- the country's biggest public pension fund -- have been doing this for years.

However, NBIM's position is complicated because it is the arm of a sovereign government. Agitating for change at foreign companies leaves it open to accusations that it is interfering inappropriately in the affairs of other countries. That charge has mostly been levelled at sovereign wealth funds (SWFs) from the Middle East and Asia that have taken high-profile stakes in Western companies.

NBIM, which is far more transparent than most other SWFs and based in a neutral Nordic country, has a more credible claim to be a dispassionate investor rather than a tool of Norwegian foreign policy. Nevertheless, it should not be surprised if its activism is met with a backlash.

London-based private equity research firm Preqin has been busy crunching numbers from historical sales of pension fund giant CalPERS’ private equity assets.

The California pension fund sold $2.1 billion of private equity assets in late 2007 in the secondary market — which trades private equity stakes between the pension funds and endowment funds that want to exit or buy.

CalPERS updated information on its Website earlier this week giving fund data up to June 30. The tables are detailed, and forensic work is needed to work out the funds exited or bought into. Preqin said in a press release today that the net asset value of funds sold equates to 9 percent of CalPERs overall portfolio, and calculates the remaining value of its private equity portfolio at $21.5 billion.

Preqin said the majority of fund interests sold feature in the third and bottom quartiles of Preqin’s private equity benchmarks, however, the sale did include some top performing funds. 

The best performing fund interest sold was in Doughty Hanson Fund II, a buyout fund of vintage 1995 with a net IRR of 46.3 percent, Preqin said. It said the worst performing fund interest sold was in American River Ventures I, a 2001 vintage fund with net IRR of -27.7 percent. Preqin said the sales mainly included venture funds of vintages 2000 and 2001.

Calpers didn’t confirm Preqin’s calculations. The pension fund said it couldn’t specify how much more it gained from the sale in 2007, when the market was peaking, than if it had tried to sell it today.
But Leon Shahinian, Senior Investment Officer at CalPERS private equity program, said via an email from CalPERS spokesman: “In today’s market, we would have had hundreds of millions in losses.”

The pension fund said that its strategy dated back to late 2005, when its Alternative Investment Management program (AIM) presented a strategic plan to the CalPERS Board to lessen the administrative burden of having so many funds to oversee, and to optimize long-term private equity performance.

In 2006, it hired UBS Investment Bank to scrub its private equity portfolio and develop a list to sell. At that time, it had investments in several hundred funds.

The inital sale of the $2.1 billion assets — which were sold in the secondary market and not all in one go — was in the third quarter of 2007, when the Dow was ranging between 13,000 to 14,000.
CalPERS said there were 80 partnerships in this portfolio and 60 different general partnership relationships, diversified over various private equity sectors such as venture capital, distressed, buyouts, etc. Sales were completed in the fourth quarter of 2007.

The secondary market for private equity has heated up as equity markets have slid, meaning pension fund allocations to private equity have grown proportionally and now need to be rebalanced, as the FT points out in its Lex column today.