What are sovereign wealth funds, and why are U.S. leaders interested?

Here’s an idea that leaders of both major U.S. political parties appear to be open to: a government-led fund that would invest in infrastructure, energy, technology, maybe some stocks and private equity.

The Joe Biden administration has reportedly been drawing up plans for such a fund, and Republican presidential candidate Donald Trump floated the idea in a speech last week. 

Plenty of other countries already have these “sovereign wealth funds”: China, Saudi Arabia, Kuwait, Norway.

Basically, we’re talking about a pool of investment money controlled by a government, said Wendy Wang, an assistant professor at the University of Texas at Austin.

“Think of them as massive piggy banks that governments use to invest and grow their wealth,” Wang said.

Most existing funds are in small countries, containing cash they made by exporting oil, said Bill Megginson at the University of Oklahoma.

“If you tried to invest several tens of billions of dollars a year in your home market, you have a small domestic capital market, it would simply explode,” Megginson said. “You’d have the mother of all asset bubbles.”

Instead, these countries try to make a return by investing internationally. Norway’s sovereign wealth fund owns office buildings in London, Paris and Berlin. Saudi Arabia’s fund financed a pro golf league.

U.S. companies have received a lot of investment from these foreign funds, but the U.S. does have something like sovereign wealth funds at the state level.

“The benefits, long term, have produced billions of dollars for New Mexico, said Charles Wollmann, the communications director for New Mexico’s State Investment Council.

He added that the council manages $57 billion worth of assets. Texas and Alaska have similar funds. 

New Mexico’s benefited from a boom in oil and gas drilling on state land. But that won’t last forever, Wollmann said.

“Once oil and gas start to decline or ends, that production won’t produce the revenue anymore, but these funds will be here instead,” Wollmann said. And they’ll help pay for things like public education, he said. 

How a U.S. national wealth fund would work, exactly, is unclear, but one thing is certain, said Wang at UT Austin. “They need clear rules and transparency to work well.”

And both political parties would need to agree on all of them, she said.