With the Democrats and Republican leadership both recently announcing plans for a US sovereign wealth fund (SWF) if they win the November election, industry experts agree a catalyser fund that de-risks private investment is the most appropriate SWF model for the US. 

But they warn the country’s attempts to establish a SWF will face significant challenges, namely a funding shortage, given the $1.5tn government budget deficit and the approval of a divided congress. 

On September 5, Donald Trump said in a speech at the Economic Club of New York that as president he would create a SWF to invest in “great national endeavours”. Two days later, White House officials told The Financial Times that the government was working on its own SWF, echoing comments by Daleep Singh, deputy national security advisor for international economics, at the SelectUSA Investment Summit in June that the government is “going to think really hard about” creating a SWF. 

Both parties’ plans are thin on details. However, SWF experts at the IE University in Spain tell fDi that any US fund would likely mirror the new breed of SWFs focused on investing in strategic sectors in line with governments’ economic security goals.

“An instrument that could ease the decoupling [from] China, provide geo-economic security for value chains, reindustrialisation to retain jobs and talent” aligns with bipartisan goals, says Javier Capapé Aguilar, director of the university’s SWF research centre.

“The idea of the US SWF is well-aligned with other existing European-co-investment SWFs established to attract foreign direct investment (FDI), promote jobs, protect industries, or launch new sectors,” he adds. The UK is establishing its National Wealth Fund and Spanish SWF Cofides launched its Foco fund earlier this year. Both of these instruments, along with French BPIFrance, are known as catalyser funds as they aim to crowd private capital into strategic domestic projects by co-investing alongside the SWF.

Rachel Ziemba, founder of economic and political risk advisory Ziemba Insights, agrees a derisking fund is the most obvious candidate for the US. “A catalysing fund that would allow US government funds to co-invest with … capital from US and global investors”, making higher-risk investments more likely than a traditional SWF that invests in a range of public and private assets, she says. 

One characteristic that separates the US from many other countries with catalyser funds is its strong record of attracting significant institutional investment. Data tracked by Global SWF shows the US is the biggest destination of SWF investment, globally. Patrick Schena, a professor at Tufts University who co-heads its SWF institute, says this means “the idea of channelling capital into specific kinds of opportunities [must be] very targeted.”

He suggests any US catalyser fund should focus on bridging the gap from research and development to commercialisation of technologies needed for the green transition. Ms Ziemba lists renewable energy, advanced manufacturing and critical minerals as other areas a US SWF could target. 

More on sovereign wealth funds:

• UK strategy could unlock £7.7bn in foreign SWF investment
• State-owned investors continue to improve best practices
• Labour’s proposed SWF to be financed by oil windfall tax and debt

Pipe dream

Despite a growing number of countries adopting SWFs, Mr Schena and Ms Ziemba warn that US plans for any type of SWF remain a pipe dream that is held back by funding and political hurdles. 

The federal government has run a budget deficit since 2001, and it lacks the natural resource revenues and public assets in need of privatisation that have created proceeds for other countries’ SWFs. The situation is further complicated by the US government’s devolved financial system, which gives states considerable autonomy in collecting revenues and setting budgets. This is a primary reason why Diego López, Global SWF’s managing director, sees a US SWF as “very unlikely.”

Unbeknownst to many, this system has led to the emergence of more than 20 state-level SWF-like funds, with some $332bn in assets under management, according to Global SWF. The biggest are Alaska’s Permanent Fund Corporation with $78bn and New Mexico State Investment Council with $58bn.

One possible source of funding for a national SWF first proposed by the National Conference on Public Employee Retirement Systems (NCPERS) 20 years ago is the Social Security Trust Fund — a  $2.7tn pot of national retirement savings which today only invests in US government treasuries. 

“Instead of having to create a SWF out of whole cloth, there is a trust already available to the federal government … which, if it liberalised in investment scope, could effectively be a SWF” with returns going to retirees, says NCPERS executive director Hank Kim.

Leveraging an existing pool of capital could also ease congressional approval. However Ms Ziemba queries whether this is a suitable capital base for a catalyser SWF. They may struggle “trying to both get the high returns needed to pay for a rapidly growing ageing population and also invest in strategic sectors,” she says. 

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