Sovereign wealth funds are playing an increasingly important role in global development

Over the past two decades, sovereign wealth funds have firmly established themselves as critical long-term global investors. While prominent players worldwide dominate headlines with flurries of outbound transactions, emerging economies have also seen a proliferation of new funds seeking to balance financial returns with contributions to national socioeconomic development.

This pluralistic approach is underpinned by the view that a country’s economic growth partially depends on sovereign wealth funds’ ability to deploy capital at home and abroad effectively. For many nations, the transition to a knowledge-based economy presents a major challenge that must be addressed through strategic investments in domestic industries with greater reliance on intellectual capital.

Equipped with the necessary financial prowess, a long-term investment horizon and the aptitude to rapidly scale their interests in specific sectors in alignment with policy objectives, sovereign investors tend to be well-placed to take a leading role in nurturing knowledge economies. It is no surprise, then, that sovereign wealth funds have been growing in number, size and influence.

As of February 2023, assets under management of sovereign wealth funds globally stood at $11.3 trillion, up more than tenfold in the last decade. Despite a reduction in portfolio valuations in 2022, robust capital deployment continued with a record $257.5 billion invested across 743 deals, with the highest ever number of $1 billion-plus ‘mega-deals’ also completed. Indeed, five of the ten largest investments by state-owned investors in history took place during 2022 and five of the top ten most active sovereign wealth funds this year are from the Gulf region.

Historically, sovereign wealth funds have been vehicles for investing domestic capital surpluses in international markets to generate robust financial returns. But, as a result of shifting government priorities in the wake of slowing globalization, the global pandemic, geopolitical conflicts and supply chain disruptions, governments have focused on re-evaluating and re-sizing their social and economic approaches.

With varying governmental priorities across markets, multiple types of sovereign investors have emerged to serve specific purposes such as stabilization, savings and reserve investment funds.

One type of wealth fund that has gained prominence in the last decade is strategic development sovereign wealth funds. Unlike their counterparts, strategic funds focus on contributing to the execution of economic transformation plans within their own nation. To meet the priorities of governments building capacity domestically, diversifying economies and boosting local employment, these funds typically deploy capital in domestic infrastructure, advancing the growth of key industries aligned with long-term policy objectives.

Five integral roles demonstrate how strategic development sovereign wealth funds deliver for their nations:

Drive impact domestically: Spur direct investments, joint ventures, nurture new partnerships and participate in overseas infrastructure projects;

Create national champions: Nurture prominent domestic companies within strategically important sectors, expand capabilities for positive multiplier effects on the economy;

Stimulate innovation and R&D: Establish partnerships with private sector companies, encourage foreign direct investment to promote R&D and innovation within portfolio companies;

Drive sustainable outcomes: Embed ESG considerations within investment approaches, contribute to building more resilient economies while supporting national sustainability aspirations;

Creating resilient, competitive economies: Enhance in-country productivity, forging co-investment partnerships, supporting the growth of SMEs, plug market gaps and embrace a geographic diversification strategy.

Take, for example, ADQ’s instrumental role in developing Abu Dhabi’s national energy company TAQA, which, since the fund’s investment, has seen its value skyrocket and has since successfully listed $1.5 billion worth of bonds on the London Stock Exchange — a sale that was 10 times oversubscribed.

In Saudi Arabia, the country’s Public Investment Fund holds a 44% stake in Acwa power, which is pushing to expand its green hydrogen capacity in the Kingdom and beyond. This technology is a key tool in our fight against climate change, but requires large sums of capital up front to develop capacity — this kind of critical investment in the future is where sovereign wealth funds increasingly thrive.

The bottom line is that sovereign investors have a profound impact in spearheading sustainable economic growth and forging a better future for their nations. As sovereign wealth funds continue to support strategic government objectives, embrace innovation and navigate market complexities, their significance to nations becomes indispensable, fostering large-scale transformation in mature and emerging economies worldwide.

Given the increasingly prominent role of sovereign investors, research by ADQ seeks to shed light on how sovereign wealth funds are accelerating change and stimulating economic development in their domestic markets. The fund has published a paper exploring this topic: ‘Foundation for Prosperity: The contributing role of sovereign wealth funds in laying the building blocks for economic growth’. The paper, based on consultations with government officials, industry experts and policy advisors, examines the substantial contributions of sovereign wealth funds in creating a tangible, positive impact on economies and societies beyond financial returns.

It's findings: sovereign wealth funds are playing increasingly important roles in development — and that doesn't look set to change any time soon.