Analysis and News

SWFs and Domestic Investments

BY GEOCAP's Contributor: Govindra Raghubansi

A Sovereign Wealth Fund (SWF) is a type of extra-budgetary fund that operates outside the annual government budget process. SWFs traditionally were created for macroeconomic objectives such as fiscal stabilisation or to save for future generations. The top 15 SWFs have over 8.5 trillion USD Assets under Management. 


Domestic versus External Investments 


Domestic investment is necessary for developing countries. Governments must invest in education, health, and public infrastructure if they wish to achieve middle- or high-income status. The use of a Sovereign Wealth Fund as a strategic domestic investment tool includes:


1.     Infrastructure Investment: Several high-income countries have strategic investment funds such as Singapore Temasek, Ireland Strategic Investment Fund and New Zealand Superannuation. However, the need for infrastructural investment can be seen even more with developing countries with large infrastructure deficits and low and middle income. Countries with an explicit mandate to invest locally in infrastructure include Kazakhstan’s Samruk-Kazyna and India’s National Investment and Infrastructure Fund (NIIF).


2.     Higher Returns: Many SWFs invest at home as returns are higher than overseas. These returns should be considered based on their Financial and Economic status. It must be noted that the investments should be done in a manner that does not displace private investors. Instead, it should foster Public-Private partnerships, encouraging investment into sectors with higher risk but significant economic benefits such as renewable and green sectors.


3.     Independence: The 2008 Global Financial Crisis and COVID-19 pandemic have resulted in a reduction in the availability of credit and aid from developing nations. The SWF funds can be utilised to supplement and develop necessary projects without being reliant on external economies.


4.    An Establishment of Strong Corporate Governance: Investing with private investors, pooling with other SWFs, and co-financing with regional development banks might all assist funds to minimize risk, add expertise, and improve the legitimacy of their investment decisions. Strong corporate governance, professional staffing, transparent reporting, and independent audit are requirements for SWF's investing locally.


The Ireland Strategic Investment Fund is an example of an SWF that has managed to incorporate all these components successfully. It is a large and long-term investor who actively contributes to the sustainability of the Irish economy, especially in the areas of regional development, housing, indigenous businesses, climate change, and industries negatively affected by Brexit. The Discretionary Portfolio (€8.1 billion) and the Directed Portfolio (€6.9 billion) make up the ISIF. The Discretionary Portfolio has a double bottom line mandate to invest commercially in a way that supports Irish economic activity and jobs. The Discretionary Portfolio is comprised of the Irish Portfolio (€2.7bn) and the Global Portfolio (€5.5bn).


The ISIF portfolio includes infrastructure, energy, housing, commercial real estate, SMEs, food and agriculture, forestry, technology, life sciences, education, and international financial services. The Fund set an aim of attracting €1 million in third-party money for every €1 million it initially invested. As of December 31, 2019, ISIF had surpassed its goal, with a co-investment rate of €1.8 million for every €1 million contributed by ISIF. This has built resilient partnerships for the Irish economy and ensures investment for the future.


There are many such examples of successful SWFs investing at home. For these SWFs to be successful, the governance structure should be built to protect it from political pressures. Investment and financial performance must be transparently reported.


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