A Business Case for US Sovereign Wealth Fund

Introduction

In January, U.S. President Donald Trump announced the creation of the first American sovereign wealth fund, fulfilling a campaign promise. He formalized the move with an executive order mandating the development of a plan for the fund within 90 days with the recruitment of Morgan Stanley banker Michael Grimes to lead the initiative. This marks a significant moment, especially as sovereign wealth funds (SWFs) become increasingly influential in global markets.

This report aims to study two questions:

1. How are Sovereign Wealth Funds shaping global finance?

2. What is the Business Case for the US Sovereign Wealth Fund?

I hope you enjoy it. Feel free to reach out if you want to discuss this further! 

Let’s Dive in

Introduction to Sovereign Wealth Funds

While SWFs have existed in one form or another since the 1950s, their recent prominence has increased public scrutiny. Much of this attention is due to the establishment of SWFs by major economies such as China and Singapore, and now the United States (US) and the United Kingdom (UK), which has raised concerns about the role of state actors in global markets.

Sovereign wealth funds (SWFs) are state-owned investment funds that own and manage a country’s excess wealth, typically derived from natural resource revenue, trade surpluses, or foreign currency reserves. The early form of Sovereign Wealth Funds stemmed from many emerging-market economies (EMEs) and commodity-exporting nations which have experienced sustained capital inflows and an accumulation of substantial foreign exchange reserves. For examples:

• Norway: Norges Bank Investment Management ($1.66T AUM)
  Founded in 1996, NBIM was established to manage the country’s surplus petroleum revenues to ensure that Norway’s oil wealth would benefit future generations and stabilize the economy against oil price fluctuations.

• Saudi Arabia: Public Investment Fund ($925B AUM)
  Founded in 1971, PIF was originally established to finance domestic development projects, and today it has become a key finance instrument of Saudi Arabia’s Vision 2030 initiative, including investments in local infrastructure development such as the NEOM.

• China: Chinese Investment Corporation ($1.24T AUM)
  Founded in 2007, CIC was designed to manage China’s vast foreign exchange reserves, which ballooned due to decades of trade surpluses and foreign direct investment inflows in the 2000s.

What are the different types of Sovereign Wealth Funds?

The design and objective of the sovereign wealth funds vary depending on the government leadership and funding sources. However, conceptually SWFs can be grouped into three archetypes, each with a different degree of focus on economic development and financial return objectives

Capacity builder funds are funds that are designed to empower their development effort and create jobs. Examples of capacity builder SWF are Khazanah Nasional in Malaysia and the National Investment and Infrastructure Fund (NIIF) in India.

Future generation funds are focused on wealth preservation and growth, similar to most private-sector capital allocators. Examples include the Singapore Investment Corporation (GIC), NBIM in Norway, and Australia’s Future Fund.

Strategic investors, however, share commonalities across the other two funds, it operates with a dual focus on financial returns and economic development. They invest in portfolios to build up strategic sectors in their own countries. Prominent examples include the Public Investment Fund (PIF) in Saudi Arabia, Temasek in Singapore, and the Qatar Investment Authority (QIA) in Qatar.

The governance of Sovereign Wealth Funds (SWFs) also varies significantly. Each state tailors its SWF’s investment strategies, reporting standards, and operational independence to meet its objectives. For instance, Norway’s NGIM restricts investments in private markets, while Singapore’s Temasek is primarily mandated to invest locally within Singapore and Southeast Asia.

Who Are the Sovereign Wealth Funds Players?

In 2024, more than 150 Sovereign Wealth Funds (SWFs) were managing over $13 trillion, with projections indicating this could grow to $19 trillion by 2030. Over half of SWF capital is derived from commodity exports, making these funds highly sensitive to fluctuations in oil prices. The growth of existing SWFs could be further bolstered by the emergence of new funds globally.

Most funds are concentrated in the Middle East, with examples such as the Abu Dhabi Investment Authority (ADIA), Kuwait Investment Authority (KIA), Public Investment Funds (PIF), and East Asia, including China Investment Corporation (CIC), Government of Singapore Investment Corporation (GIC), Temasek, and Korea Investment Corporation (KIC). Norges Bank Investment Management (NBIM) is the exception in Europe, it is also known as the largest SWF in the world, managing over $1.8 trillion alone.

However, the sovereign capital's destination contrasts with its source. In the last five years, over 60% of the funds have been deployed in North America and Europe, which are seen as mature markets with greater stability and return profile. For example, over 60% of ADIA’s $800 billion portfolio is invested in North American and European assets.

_{(Note: Nicolai Tangen, the CEO of NBIM hosts a podcast In Good Company, and would recommend it if you are interested in learning more about SWF / investment management)}

Key Trends Shaping Sovereign Wealth Funds

Countries are increasingly adopting the sovereign wealth fund concept, to expand and protect their national sovereignty through the use of capital. Investing locally and abroad in critical infrastructure such as airports, railroads, telecommunication towers, data centers, and water systems to bolster domestic economic development and expand national influence abroad. Compared with the private sector investment managers, SWFs take a longer horizon view on investments and evaluate investment success with its impact on society and international relations rather than pure monetary gains.

Three pivotal megatrends are transforming these sovereign investors' strategies and roles in their economies. These trends are reshaping investment priorities and driving broader changes in the world

1. Internalization of Capital

2. Acceleration in Long-Term Investments with Positive Externality

3. Strategic Cross-Border Investments

#1 Internalization of Capital

Many SWFs (or LPs) are increasingly investing in developing direct investing and value creation capabilities so they can internalize and reallocate their investments from funds to direct investments. This capital internalization shift allows for margin savings from fund management fees (i.e., 2/20 fee models for external fund management) and greater control over investment selections

• Realize Benefits of Scale from Internationalization: SWFs leverage their capital scale advantages to actively manage and enhance the value of their private holdings, distributing cost base across a large asset pool. According to CEM Benchmarking, large, internalized, active investors generate higher net value-added compared to smaller, externalized, passive investors. This underscores a strong quantitative case for the internationalization of private assets as a strategy to maximize long-term returns

• Rise of Co-investments: Co-investments have become a key strategy for SWFs, enabling the transition from highly externalized funds to a more internalized operating model. Many funds face challenges in hiring the necessary talent to manage investments, from due diligence and value creation. By engaging in co-investments, SWFs (LPs) can tap into the expertise and due diligence capabilities of private equity firms (GPs), all while maintaining better margins

  • For example, ADIA, and GIC have co-invested into Deutsche Bahn’s logistic arm Schenker for $14Bn with CVC Capital Partners, a private equity firm based in the US. The SWFs were able to benefit from CVC’s due diligence process and expertise with buyouts without needing to commit funds to CVC capital partners.

 #2 Acceleration in Long-Term Investments with Positive Externality

A state-run fund can be particularly effective when its investments help address market failures—situations where the private sector is unwilling or unable to invest due to high costs, long time horizons, or misalignment between private and social benefits. This is often the case in critical industries such as defence, infrastructure, and energy, where government-backed capital can accelerate development and generate broader economic benefits.

SWFs excel in investing where:

• Significant positive externalities benefit society beyond direct financial returns.

• High upfront costs and long payback periods deter private investors.

• Uncertainty or market inefficiencies make private capital hesitant.

SWFs play a critical role in bridging investment gaps where private capital is scarce or risk-averse. This is particularly relevant in, or uncertain near-term profitability. By stepping in, SWFs can de-risk these sectors, attracting additional private investment and fostering long-term economic resilience.

For example, Mubadala invested in GlobalFoundries in 2009, at a time when private investment in the UAE’s semiconductor industry was limited. This strategic move helped establish a competitive semiconductor sector in the region, enhancing the UAE’s technological sovereignty. Similarly, Saudi Arabia’s Public Investment Fund (PIF) is spearheading NEOM, a futuristic city development projected to cost over $5 trillion over 50 years, aiming to drive innovation and economic diversification.

There are three areas where SWFs are driving significant impact:

#3 Geopolitical decoupling shapes capital flows

Geopolitical tensions are prompting principal investors to redirect capital flow. More investments are taking place in emerging markets in ASEAN, Africa, and the Middle East. This shift includes aligning investments with national development goals and forging strategic partnerships to navigate political complexities. Here are four examples illustrating different patterns affecting financial flow to SWFs

1. Saudi-Brazil Alliance SWFs also act as catalysts for cooperation among global economies. For example, Saudi Arabia’s Public Investment Fund (PIF) announced a $15 billion investment in Brazil in areas such as green hydrogen, infrastructure, and renewable energy. It has fostered strategic alignment and trust between the two countries, establishing Saudi Arabia’s presence in trade with South American nations.
   

2. Abu Dhabi-Singapore Alliance: Abu Dhabi’s ADIA and Singapore’s GIC, the two largest SWFs in their respective regions, have co-invested in 10 deals over the past five years, including the $10.2 billion acquisition of Zendesk, $14 billion for Emerson Climate Technologies, and $30 billion for Medline. Their continued collaboration has not only deepened ties between the two sovereign investors but has also strengthened economic relations between Abu Dhabi and Singapore, with non-oil bilateral trade nearing $6 billion last year.
   

3. India Attracting Foreign Investment: The Government of India has established the National Investment and Infrastructure Fund (NIIF), a sovereign-linked alternative asset manager to capture foreign economic interest in India. To support this initiative, the government contributes 49% of the capital to NIIF, while the remaining 51% comes from a diverse group of investors, including SWFs like ADIA, Temasek and Australian Super, with other asset owners including OTPP and ICICI Bank.

4. Divestments in Chinese Institutions: SWFs ramp up/down investments as the geopolitical relationships between countries change. For example, deal value in China has declined from 6% of global deal value in 2020 to 2% in 2024 as many Western investors are redirecting funds away from China due to geopolitical tensions between their home governments and China.

In summary, SWFs are strategically designed to advance government economic interests. They play a key role in strengthening bilateral partnerships, forming strategic alliances, and diversifying portfolios of resource-based assets, all while aligning with national priorities.

Business Case for US-Led Sovereign Wealth Fund

On January 27, President Trump signed an executive order to establish a federal sovereign wealth fund based in the United States. Establishing such a fund could position the US as a major player in the international sovereign wealth community—an intriguing shift at a time when Trump’s ‘America First’ agenda has led the country to withdraw from many global organizations and forums.

He claimed that the fund can be capitalized through foreign tariffs imposed on foreign countries with potentially a 50% stake in TikTok as the initial capital base for the sovereign fund. Moreover, additional levers the government can pull are monetizing federal assets including real estate, infrastructure, mineral rights, and services that the US owns, or issuing “MAGA” bonds that run parallel with US Treasuries, backed by dormant non-financial public assets.

_{(For example, in 2023, Mubadala released its first-ever Green Bond, for USD 750 million. The issuance saw strong demand from the market with more than 9x oversubscription)}

Yet would it be wise to invest proceeds from these sales and leases into a new SWF instead of first paying off America’s huge and unsustainable budget deficit? Despite the staggering national deficit of $35T, the United States would use the equivalent funding to pay off instead of establishing a sovereign wealth fund. There are a few strategic rationales that may be worth considering:

1. An Alternative Funding Model to Critical Industries

2. Monetization of Underutilized Federal Asset

3. Investment Vehicle for International Negotiation

1. An Alternative Funding Model to Critical Industries

The US SWFs will not just invest in a diversified portfolio of publicly traded securities, but in targeted strategic sectors that are mission-critical to the country’s prosperity, similar to China’s Silk Road Fund or Singapore’s Temasek investment patterns.

Sovereign Wealth Funds often are seen as a more effective way to allocate funds to assets than fiscal programs, primarily due to the differences in how the capital is allocated. SWF relies on a more market-driven methodology to make strategic investments with equity/debt instruments, compared to government programs which are funded through tax benefits, loan guarantees and grants.

A clear accountability structure also creates greater opportunities for companies. SWF investment professionals are incentivized to maximize enterprise value, making them more willing to invest time and resources in driving portfolio growth. For example, Saudi Arabia’s Public Investment Fund (PIF), as the majority owner of Lucid Motors, helped the company secure land and regulatory approvals for its Saudi manufacturing plants, gain priority access to EV incentives and subsidies, and negotiate exclusive fleet deals with government entities.

Therefore, if a government wants to maximize the impact per dollar in critical industries, the SWF approach may offer a new favour in how the government can support private sector development. While government involvement may introduce some disruptions to free-market dynamics, the targeted support to key sectors can accelerate growth and enhance competitiveness against foreign rivals

2. Monetization of Underutilized Federal Asset

The monetization of federal government assets represents a huge untapped opportunity for the government. According to a White House Fact Sheet, the federal government directly holds $5.7 trillion in assets and a far larger sum indirectly (including through natural resource reserves)

The Treasury Department estimates that the US owns

• 261.5 million troy ounces (~$762.5B)

• 640 million acres of land (25% of American land)

• 207,000 bitcoins (~$1.5T)

• Large amount of PP&E, i.e., buildings & equipement (~$1.5T)

Currently, there is no centralized provision or return expectation for the federal assets held by the government. These assets are administered and managed by federal agencies, presenting opportunities for improved monetization.

With an administration focused on shrinking the size of government, the privatization of federal buildings, land, and other assets can be a feasible way to raise seed capital. For example, in 2006, the Australian SWF Future Fund was initially capitalized by the sale of state-owned assets, including the Commonwealth Bank of Australia (CBA) in 1996, which raised around AUD 7 billion and contributed to building the Fund’s capital base. Additionally, the Australian government sold stakes in various other entities, such as the Telstra Corporation (1997–2006), which provided further funding to the Future Fund.

Overall, the strategic monetization of federal assets could unlock significant funding for reinvestment into the country. However, its success depends on careful design, particularly in ensuring that the process remains insulated from the partisanship of changing administrations.

3. Investment Vehicle for International Negotiation

Sovereign Wealth Funds (SWFs) are increasingly shifting from their traditional role of investing surplus government revenues in public markets to taking direct ownership of unlisted foreign assets. This trend reflects a strategic move to enhance international trade relations and bolster national security. By acquiring stakes in private companies and infrastructure abroad, SWFs not only diversify their portfolios but also forge stronger economic ties with other nations.

In the past few months, the US has leveraged the use of tariffs as a negative reinforcement to negotiate with Canada and Mexico regarding fentanyl and illegal immigration issues. However, there can also be a positive reinforcement to furthering their international relations agenda - one significant way would be through capital investments (or you may call it foreign direct investments (FDI))

Example 1: China

China provides a notable example of leveraging capital investments to foster multilateral relationships, particularly with developing countries in Southeast Asia, the Middle East, and Africa.

• Creating African Allies Through Investments: China has made significant investments in Africa, including over 70% of the continent's telecommunications infrastructure, to cultivate strong relationships with African governments. These ties can influence opinions in international forums. For instance, African countries have often supported China's diplomatic positions in the United Nations General Assembly, particularly regarding human rights, the "One China" policy, and opposition to Western intervention

• Expansion in Maritime Presence: China has significant influence over global ports, with nearly 130 under some level of PRC ownership and heavy investments in strategic maritime infrastructure. Many of these ports, particularly in Latin America and the Caribbean (LAC), are controlled by Chinese state-owned enterprises, raising concerns over military-civil fusion.

• Debt Diplomacy and Strategic Leverage: China has used its Belt and Road Initiative (BRI) to provide large-scale infrastructure loans to developing nations. When countries struggle to repay these debts, China has leveraged the situation to gain strategic concessions. For example, Sri Lanka’s Hambantota Port, which was leased to China for 99 years after the country failed to meet its debt obligations. This model allows China to secure geopolitical advantages, influence foreign policy decisions, and expand its military and economic reach

(Note: The Chinese SWF, Chinese Investment Corporations were key to the national capital initiatives such as the Belt & Road Initiatives and the Silk Road Fund)

Example 2: The United Arab Emirates (UAE)

Another prime example would be the United Arab Emirates (UAE), particularly through Abu Dhabi’s sovereign wealth funds (SWFs) like Mubadala and the Abu Dhabi Investment Authority (ADIA), has strategically used capital investments to expand its global influence. Unlike China’s debt-driven model, Abu Dhabi deploys long-term equity investments in key industries, including technology, energy, and infrastructure, to strengthen economic and diplomatic ties.

• Normalization of UAE-Israel Relations (Abraham Accords): The Abraham Accords, signed in 2020, marked a historic normalization of relations between the UAE and Israel, later joined by Bahrain, Morocco, and Sudan. While the deal was largely framed as a peace agreement, Abu Dhabi’s sovereign wealth funds (SWFs) played a key role in facilitating and reinforcing the agreement, using capital as a tool for negotiation and diplomatic leverage. Shortly after the peace deal was announced, the UAE announced a $10 billion fund for investments in Israeli industries.

• Access to Military Support: Another key example following the Abraham Accords was securing approval of a $23B arms package including F-35 fighter jets from the US. Historically, the U.S. had been cautious about selling advanced military technology to the UAE due to concerns about preserving Israel's qualitative military edge in the region. However, after the Accords, this stance shifted. The U.S. swiftly authorized the sale, and in parallel, UAE investment funds such as Mubadala and ADIA significantly increased their stakes in U.S. companies, including major defence contractors.

• Energy Diplomacy: The UAE leverages its energy investments to enhance diplomatic influence, playing a key role in global energy security. By partnering with energy-rich nations like Russia, Saudi Arabia, and Iraq, and sharing existing relationships with superpowers including the US and China. The UAE gains significant influence, which helps them shape energy policy in organizations like the IEA and IRENA, and secure strategic concessions from both developed and emerging economies.

From the lens of the United States, an American SWF could serve as a tool to counterbalance China's economic diplomacy by strategically directing capital into key regions like Europe, Latin America, and East Asia. The U.S. can leverage its SWF to cultivate long-term alliances to support economic growth and protect itself from geopolitical outbreaks. This approach would reinforce economic ties and enhance American geopolitical influence in global decision-making forums.

Governance Considerations

The decision to establish a SWF can pose substantial consequences if it is not managed well. While the largest reason being the opportunity cost where the capital could be used to offset the country’s outstanding debt, the other key risk is the execution of the SWFs.

Many SWFs, especially those from less democratic countries, operate with limited transparency regarding their funding sources, governance, and decision-making processes. This lack of oversight can lead to inefficient investments, misuse of funds, and corruption.

Funds like Venezuela’s FONDEN and Malaysia’s 1MDB have faced criticism for operating with little public scrutiny, raising concerns that these funds may be used to serve political or personal agendas rather than contributing to long-term national development. Proper checks and balances need to be in place to ensure SWFs can be used to prop up authoritarian regimes and minimize conflict of interest among SWFs and government leadership.

GlobalSWF has developed a GSR scoreboard to evaluate how Sovereign Wealth Funds are managed from a governance, sustainability and resilience perspective. In addition, there are additional benchmarks and evaluation tools including:

• Santiago Principles, GAPPs (International Forum of Sovereign Wealth Funds, IFSWF)

• Truman Scoreboard (Peterson Institute for International Economics, PIIE)

• Linaburg-Maduell Transparency Index, LMTI (Sovereign Wealth Fund Institute, SWFI)

• Global Pension Transparency Benchmark, GPTB (CEM, Conexus Financial’s Top1000funds)
  
  

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