New sovereign wealth funds have new tasks

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The past decade has seen a wave 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, safeguard intergenerational wealth and provide stability against shock events, while seeking better financial returns in more lucrative asset classes.

This SWF growth has provided additional liquidity to the markets, and many of these funds have become leading limited partnerships in the financial markets. Many other governments are following the trend with interest.

The strategy appears to be successful. Recent months have seen a new wave of SWF, which has not been driven by the typical economic forces that created the older funds, such as oil and gas revenues. Egypt’s flagship fund, the Sovereign Fund of Egypt, has launched a new separate sovereign industrial fund that will invest in various industrial sub-sectors in Egypt, including food, construction materials and the production of railway and train supplies, among others. This new model follows locally oriented funds, such as Singapore’s Temasek, which traditionally backs national champions without worrying about high prices in the local economy.

The proposed structure allows the Egyptian government to tap other sources of capital, such as other sovereign governments and funds, to serve as investors in the new vehicle. Reaching out to governments like the UAE will also strengthen regional economic and security cooperation.

Similarly, Ireland faces a significant surplus created by corporate taxes paid by foreign multinationals. Late last year, the country announced it would establish two sovereign wealth funds to absorb these revenues and reinvest them in local and international markets. The government has started implementing the plan in recent months and has allocated around $100 billion to the funds, one of which also focuses on local and short-term assets. The new sources of capital for these emerging funds, the growing interest in local assets and the revival of local industries reflect the latest political and economic environment designed to support local players in a context of inflation and high interest rates.

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