The previous decade had seen a wave of creation of sovereign wealth funds (SWFs), driven by a boom in the commodity market and foreign exchange reserves. Governments from Chile to the United Arab Emirates (UAE) are using sovereign financial instruments to diversify their economies and investment portfolios, protect generational wealth and provide stability from shock events, while seeking greater financial returns from higher-performing asset classes.
This growth of SWFs provided additional liquidity to the markets, and many of these funds became leading limited partnerships in the financial markets. Many other governments are watching this trend with interest.
The strategy turns out to be successful. Recent months have demonstrated a new wave of SWFs, not driven by the typical economic forces that created the old funds, such as oil and gas revenues. Egypt’s main fund, the Egypt Sovereign Fund, has launched a new separate sovereign industrial fund that will invest in Egypt’s various industrial sub-sectors, including food, construction materials, and rail and rail products, among others. This new model follows local market-focused funds such as Singapore’s Temasek, which have traditionally backed national champions without worrying about inflated prices in the local economy.
The proposed structure allows the Egyptian government to attract other pools of capital, such as other sovereign governments and funds, as investors in the new mechanism. Engagement with governments such as the UAE will also strengthen regional economic and security cooperation.
Similarly, Ireland faces a significant surplus created by corporation tax paid by foreign multinationals. Towards the end of last year, it announced it would create two sovereign wealth funds to absorb those earnings and reinvest them in local and international markets. The government has launched the plan in recent months and has committed about $100 billion to funds, one of which also targets local and short-term assets. New sources of capital for these new funds, growing interest in local assets and the revival of local industry reflect the latest political and economic environment designed to support local players in an environment of inflation and high interest rates.