Sovereign wealth funds have proliferated in recent years, giving governments more flexibility in how they use surplus financial resources and diversify investments for future generations. Although most sovereign funds are established in emerging market countries, driven by energy resources, they have recently become a more important financing tool in developed countries as well.
Britain’s New Labor government announced this month that it would create a new sovereign fund in a bid to accelerate economic growth, boost foreign direct investment and create jobs. Chancellor of the Exchequer Rachel Reeves has announced that the existing UK Infrastructure Bank will be converted into the National Wealth Fund (NWF), headquartered in Leeds. The initial capital target will be £27.8bn. The government plans to introduce legislation that would allow NWF, like other global sovereign funds, to invest in asset classes outside the infrastructure sector.
New sovereign wealth funds are quickly taking off. Already last month, the company announced it would provide a total of £1bn of funding guarantees to Barclays UK Corporate Bank and Lloyds Banking Group to accelerate the refurbishment of UK social housing.
NWF’s business model includes mobilizing private capital to support government investment projects, experimenting with new blended finance solutions, increasing the scale and impact of investments, and adding performance guarantees. NWF’s investment focus is on clean energy and growth industries such as green hydrogen, carbon capture, and gigafactories. According to the New Economics Foundation, the fund has the potential to raise £100bn of private funding.
The Government must take sufficient action to address the UK’s growing structural, regional and sectoral inequalities, and the inability of mayors and other political and business leaders to effectively fund major investment projects. The government is facing increasing criticism for not taking the necessary steps. UK pension funds’ participation in such projects has historically been limited. Indeed, the decision to establish the NWF coincided with the decision to allow pension funds to invest alongside British Business Banks, which provide capital to private companies.
The UK is not the only G7 economy seriously considering launching a new sovereign wealth fund. Both Democratic and Republican U.S. lawmakers floated the idea of a new U.S. government fund on the campaign trail, arguing it could generate new ideas for strategic investment, economic growth and job creation. .
