Every once in a while I get a question where I think it would be wiser for me to not go there. This week’s question on a potential U.S. sovereign wealth fund is probably (almost definitely) in that same vein, but I couldn’t resist.
I’m not going to touch on any of the hotly debated topics regarding where the funds would come from, or which branch of government would oversee spending. Let’s just agree that there are plenty of better-informed discussions on these points in various other publications. But I will say this – whether you think the idea of a U.S. sovereign wealth fund is outrageous or sensible, I can’t believe it’s taken this long to have this conversation.
What do you think of recent presidential campaign proposals to create a U.S. sovereign wealth fund? Should the U.S. create a sovereign wealth fund?
Let me start by saying that I really have no business answering your second, direct question. I do, however, have some familiarity with the biggest foreign sovereign wealth funds already out there, so I’ll share some thoughts on your first question.1
Sovereign wealth funds (SWFs) are part of the larger cohort of institutional investors. As a longtime allocator for various endowments and foundations, I’ve crossed paths with a lot of investment team members at foreign SWFs over the years. I’ve shared dinners, shared LPACs (Limited Partner Advisory Committees), and shared investment ideas. I’ve also observed the rise of newer SWFs and an evolution in how they invest.
There are a few things that have stood out to me in my interactions over the years. And I want to preface the following by saying, these are purely my observations and inherently anecdotal.
I also want to draw a distinction between large government pension funds and sovereign wealth funds. The former generally have longer-standing investment programs, seem to prioritize generating returns for their pensioners, and release a fair amount of publicly available information. The latter include newer pools of capital (though some SWFs have existed for decades), are more of a mixed bag in terms of investing for returns vs. national priorities, and are far more opaque.
And so that’s the first thing I’ll note – in my experience, SWFs don’t provide a lot of transparency. Not even, at times, to their own internal investment teams. The total size of a SWF can be a state secret, and I was surprised on more than one occasion to learn investment team members were not universally privy to that information. This partitioning of information seemed to extend to investment strategies and the siloing of team members to specific areas of investment focus. If a SWF is not sharing portfolio information with internal team members, it is most certainly not sharing that information publicly.
The second thing I’ll note, in observing SWFs that are newer (let’s say less than 20 years old), is that investing a SWF-sized quantum of cash is not an easy thing to do. It takes discipline and time to build a diversified portfolio.2 That said, all of these SWFs now run mature, complex, highly sophisticated investment programs with a mix of direct and fund investments.
And finally, SWFs hold a lot of assets today, over $10 trillion by one estimate.3 My guess is that the real amount is much higher (see comment on SWF opacity). With all that capital, SWFs can do some pretty creative things. Large SWFs have direct investment teams, independently sourcing or co-investing alongside private equity, venture capital, and real asset managers. At some point post-GFC, rather than just committing capital to private equity funds, some SWFs started taking equity stakes in the general partnerships of private equity managers. It’s now so common with large asset managers it’s almost unremarkable.
In this recent difficult fundraising environment, private asset managers eager to capture investment dollars from SWFs have also accommodated any number of investor friendly requests, from sizable fee discounts to investing in the SWF’s local startup scene.4
There is a slightly depressing irony to this whole dynamic. Foreign sovereign wealth funds have been taking ownership stakes in private U.S. asset managers, companies, and more recently, sports teams. When these homegrown private asset managers, companies, and sports teams generate value to their investors (and they do, and it’s often enormous), that value is enjoyed by their equity holders. When the equity holders include foreign SWFs, the citizenry of those countries share in the wealth creation. But domestically, in the place where that value is created, there isn’t a similar mechanism for the average person to benefit.
I’ll end on another observation. One thing that seems to get glossed over with all the discussion and debate around how the U.S. might fund a new SWF: the U.S. already has SWFs. They’re just not federal SWFs, they’re state-run SWFs. In fact, the Texas Permanent Fund is one of the oldest recognized SWFs. And over the years, I’ve frequently crossed paths with the Alaska Permanent Fund, which has been successfully running since 1976. (It’s not a coincidence that both were made possible by state oil revenues.)
Of course, creating and managing a federal SWF would undoubtedly be far more complex and more politically charged. But at least there’s some precedent within the U.S. for governance, investment management, disclosure, and use of proceeds.
Thanks for joining this week! And as always, reach out with any questions: askacio@ivyinvest.co.
Until next week,
Wendy
Apparently, there are 170+ sovereign wealth funds, source: Sovereign wealth funds in the post-pandemic era - PMC (nih.gov). I had no idea prior to writing this piece that there were so many. I most frequently encountered the same handful of SWFs from Asia and the Middle East.
Earlier in their buildouts, these newer SWFs occasionally recruited from U.S. endowment and foundation investment talent pools, which tells me a little bit about the approach they wanted to take (at least at those points in time).