Sovereign wealth funds have been multiplying in recent years, giving governments greater flexibility as to how they deploy their extra financial resources and diversify their investments for future generations. While most have been established in emerging-market countries, driven by energy resources, sovereign funds have lately become a more prominent financing tool in the developed world as well.
The UK’s new Labour government announced this month that it is creating a new sovereign fund as part of its effort to accelerate economic growth, boost foreign direct investment, and generate more jobs. Chancellor of the Exchequer Rachel Reeves announced that the existing UK Infrastructure Bank would be converted into the National Wealth Fund (NWF), headquartered in Leeds. The initial capital target will be £27.8 billion. The government will introduce legislation allowing the NWF to invest in assets classes outside the infrastructure category, similar to other global sovereign funds.
The new sovereign fund is getting off the ground fast; already last month, it announced that it is supplying financial guarantees to Barclays UK Corporate Bank and Lloyds Banking Group on a combined £1 billion of funding to accelerate the retrofitting of social housing in the UK.
The NWF’s business model will include mobilizing private capital in support of government investment projects, experimenting with new blended finance solutions, increasing the size and impact of investments, and adding performance guarantees. The focus of the NWF’s investments will be clean energy and growth industries, including green hydrogen, carbon capture, and gigafactories. The fund could raise £100 billion of private finance, according to the New Economics Foundation.
The government has faced growing criticism that it has not done enough to address the UK’s growing structural, regional, and sectoral disparities and the inability of mayors and other political and business leaders to effectively deploy capital in major investment projects. British pension funds’ participation in such projects has been limited historically; in fact, the decision to create the NWF was taken simultaneously with one 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 that is seriously considering the launch of a new sovereign fund. Both Democratic and the Republican lawmakers in the US floated the idea of a new American sovereign fund in their elections campaign, arguing that it could unlock fresh ideas for strategic investments, economic growth, and jobs creation.
