The number of sovereign wealth funds has been increasing in recent years, giving governments greater flexibility in how they use their additional financial resources and diversify their investments for future generations. Although most were created in energy-driven emerging economies, sovereign wealth funds have recently become a more prominent financing tool in the developed world as well.
Britain’s new Labor government announced this month the creation of a new sovereign wealth fund as part of its efforts to boost economic growth, boost foreign direct investment and create more jobs. Chancellor of the Exchequer Rachel Reeves has announced that the existing UK Infrastructure Bank will be transformed into the National Wealth Fund (SWF), headquartered in Leeds. The initial target capital will be £27.8 billion. The government will introduce legislation allowing the SWF to invest in non-infrastructure asset classes, similar to other global sovereign wealth funds.
New sovereign wealth fund launches quickly; Already last month it announced it was providing financial guarantees to Barclays UK Corporate Bank and Lloyds Banking Group for a combined £1 billion in funding to accelerate the upgrading of social housing in the UK.
The SWF’s business model will include mobilizing private capital to support public investment projects, experimenting with new blended finance solutions, increasing the size and impact of investments, and adding performance guarantees. The focus of the SWF’s investments will be clean energy and emerging industries, including green hydrogen, carbon capture and gigafactories. The fund could attract £100 billion of private funding, according to the New Economics Foundation.
The government is facing growing criticism that it has not done enough to address growing structural, regional and sectoral inequalities in the UK, as well as the failure of mayors and other political and business leaders to effectively deploy capital in major investment projects. The participation of UK pension funds in such projects has historically been limited; In fact, the decision to create the SWF came at the same time as the decision to allow pension funds to invest alongside the British Business Bank, which provides capital to private businesses.
The UK is not the only G7 economy seriously considering the creation of a new sovereign wealth fund. Both Democratic and Republican lawmakers in the US have floated the idea of a new US sovereign wealth fund in their election campaigns, arguing it could open up new ideas for strategic investment, economic growth and job creation.