Sovereign wealth funds are becoming the hottest thing in global finance.
Indonesia launched its second state investment fund, the Daya Anagata Nusantara Investment Management Agency, or Danantara for short, earlier this week. The fund exists alongside the Indonesia Investment Authority, itself a relative youngster, only being launched in late-2020.
Sovereign wealth funds aren’t a new idea. Norway, Saudi Arabia, Singapore and China, among others, have long invested surplus funds, whether earnings from natural resources, foreign exchange reserves or pensions, in the hopes of getting a return.
Yet the concept is back in force. Both developed economies and emerging markets have recently established their own funds. Even the U.S. is exploring the idea: Earlier this year, President Donald Trump ordered the establishment of a sovereign wealth fund, with a plan due by early May.
Governments increasingly want to leverage public funds to capture—or recapture—strategic sectors. “It’s an extension of a country’s industrial policy,” says Priyanka Kishore, an independent economist and founder of consulting firm Asia Decoded.
Take Danantara, for exmaple: "Indonesian president Prabowo Subianto says it's a 'powerful development tool', clearly emphasizing its focus on industralizing Indonesia," she explains.
And as global economics and global politics combine, these funds could become a valuable tool of government policy.
Sovereign wealth funds vs. state investors?
Many of the most prominent sovereign wealth funds, like Norway’s Government Pension Fund, are akin to asset managers, taking stakes in public companies and acting as a relatively passive investor. The first modern-day funds were set up by oil-rich countries hoping to leverage their financial surplus, with Kuwait setting up the earliest such organization in 1953.
But today’s funds can also be different and take a more active role, investing in private markets, backing up-and-coming startups, and making a play for strategic sectors.
Take Singapore, which has two sovereign wealth funds. The first is GIC, which follows a more traditional long-term model by investing the country’s financial assets in public equities, bonds and real estate.
Temasek, on the other hand, is a much more active investor. Besides investing in listed entities, the fund sometimes owns companies outright. The fund invested in companies that played a role in Singapore’s growth, like PSA International, DBS, and Singapore Airlines.
Outside of Singapore, Temasek also backed leading startups like Ant Group, DoorDash, and Zomato in a bid to boost returns. But it’s also had some high-profile flops like the crypto exchange FTX and Indonesian fishing startup eFishery.
The state investor model is getting more global traction.
Hong Kong established its own government investment company, the Hong Kong Investment Corporation, at the end of 2022. HKIC, like its much larger peer Temasek, is looking for opportunities in strategic technologies and the “Greater Bay Area,” a group of eleven cities in southern China including Guangzhou, Shenzhen and Hong Kong. It exists alongside the Exchange Fund, the city’s de facto sovereign wealth fund.
Even traditional sovereign wealth funds are hoping to become more active investors. In the Middle East, sovereign wealth funds like Saudi Arabia’s Public Investment Fund and the UAE’s Abu Dhabi Investment Authority are funnelling money into sectors like AI, video gaming, and even professional sports, while also bankrolling new endeavors in sectors like tourism to build a post-oil economy.
Southeast Asian countries are also embracing the sovereign wealth fund to invest in infrastructure and green energy. Indonesia’s new president, Prabowo Subianto, has pitched the country’s newest sovereign wealth fund Danantara as a supercharged investment vehicle, backed natural resources and state-owned enterprises.
Yet critics have pointed to governance concerns due to a revised law that gives the Indonesian president greater control of the entities and the billions of dollars in annual dividends.
Jakarta isn't the only Southeast Asian country to recently set up a sovereign wealth fund. The Philippines also started one in 2023, when President Ferdinand Marcos Jr. established the country’s first sovereign wealth fund, the Maharlika Wealth Fund.
Why do governments want SWFs?
Governments often set up state investment funds to reinvest surpluses–whether from natural resources, foreign exchange, or even bumper tax revenue. Traditionally, they’ve been established by countries with a rich commodity sector, like oil-rich Saudi Arabia or Norway. But other surpluses can fund an SWF. China, for example, draws on its massive foreign exchange reserves; Ireland, long a haven for Big Tech looking for low taxes, is funneling some of its government revenue into its Future Ireland Fund.
“A SWF is a way for countries to take advantage of public revenues that have high variance,” says Srividya Jandhyala, an associate professor of management at ESSEC Business School, Asia-Pacific.
For example, countries may want to ensure a sudden windfall from a temporary spike in high oil prices is put towards a project with a long-term return.
Sumit Agarwal, professor of economics at the National University of Singapore, points to Singapore as an example of having well-run SWFs, crediting professional management and low tolerance for corruption.
But sovereign wealth funds are still ultimately tied to governments, which can both affect how they make investment decisions, as well as how other governments perceive those investments.
Jandhyala from ESSEC points out that investments from a sovereign wealth fund could be treated with more scrutiny by other governments, particularly when there’s geopolitical friction. For example, the U.S. under the Biden administration, increased its scrutiny of Middle East based wealth funds as part of a broader pushback on entities that are deemed to have close ties with Beijing.
Trump's play for a sovereign wealth fund
The U.S. is the largest economy to think about a sovereign wealth fund. Earlier this year, Trump ordered officials to plan to launch such a fund within the next year, and in comments to reporters even suggested that it could buy the social media app TikTok.
But it’s not only Trump. Top aides to former president Joe Biden also reportedly worked on a proposal to try to create a sovereign wealth fund that would allow the U.S. to invest in national security interests including technology, energy, and logistics.
U.S. economic luminaries, however, have criticized the prospect of a U.S. sovereign wealth fund. Former Treasury Secretary Larry Summers blasted the suggestion last September and pointed to the United States’ “big budget deficit” in a Bloomberg interview.
Some individual U.S. states like Texas and Alaska already have their own state-run investment funds, financed by their energy and mineral resources.
Others see public funding as a key part of the U.S.’s revived interest in industrial policy. Saule Omarova, professor of law at the University of Pennsylvania and a one-time Biden nominee for a Treasury position, has proposed the creation of a “National Investment Authority”, an "ecosystem of public investment funds" that would manage investments and offer both credit- and investment-based financing to worthy projects.
Agarwal thinks Trump’s idea of having a sovereign wealth fund isn’t unworkable, but notes "you need to have a surplus.” The U.S. ran a budget deficit of $1.83 trillion for its 2024 financial year and a trade deficit of $918.4 billion in the 2024 calendar year, meaning that it doesn’t have a surplus that could be used to back a sovereign wealth fund. While the U.S. does have natural resources, that revenue will need to be used to pay the interest on U.S. debt.
“It’s an idea that Trump came up with because he sees things that work elsewhere, and asks, ‘why aren’t we doing it?” he says. “There’s a reason.”
