Building a US Sovereign Fund: Function First, Politics Second

With Michael Grimes, a thirty-year Morgan Stanley veteran, joining the Commerce Department to lead a planned US sovereign wealth fund (SWF) and JR Gibbens, a Wall Street and military veteran, advising the Treasury Department on its formation, the next step is defining the fund's purpose and structure. The most pressing question these appointees face is: What should the fund be designed to achieve? Specific consideration must be given to what assets it should invest in or finance, and why private capital has previously failed to support these areas. The SWF’s design should align with its intended function. Ideally, that design would ensure it pursues its purpose without distraction.

Key Parameters for a US Sovereign Wealth Fund

Let us review the various options for a SWF’s purpose and structure.

1. Objectives

A US SWF could serve one or more key roles.

Managing Government Assets

Some sovereign wealth funds, such as Singapore’s Temasek, manage state-owned enterprises and assets. The US government (USG) owns entities with commercial functions (e.g., Tennessee Valley Authority, Amtrak, USPS). It also owns petroleum and mineral reserves, and highway rest stop leaseholds. A SWF could consolidate these, maintaining public ownership while improving efficiency and generating returns.

Providing Emergency Funding

A SWF could facilitate government actions during emergencies. One past example is the Troubled Asset Relief Program (TARP) in 2009 which both rescued troubled financial institutions and generated $15 billion in returns. With a SWF, the USG could have structured Operation Warp Speed as an investment rather than a grant. The government could have secured equity stakes or convertible debt with the $12 billion it provided, ensuring financial gains alongside its primary goal of vaccine development.

Generating Financial Returns

Norway’s SWF, one of the world’s largest, invests in global equities, bonds, and real estate to maximize returns. Critics argue that the US, as a current account deficit nation, lacks the surplus capital to pursue a fund with financial returns as its primary purpose. 

Advancing Strategic Objectives

A SWF could prioritize strategic goals that are unique to government and not fully served by private markets. The US already operates In-Q-Tel, an intelligence-backed venture capital firm that seeded firms like Palantir, and the Office of Strategic Capital (OSC) at the Pentagon (where Gibbons previously worked). A SWF could expand these efforts to sectors critical to national security and economic resilience.

2. Geographic Focus

A US SWF could target domestic and / or international investments.

Domestic Investments

A SWF could direct capital toward projects whose risk and long-term duration do not attract sufficient private investment without government support. Sectors such as critical minerals, rare earth elements and defense technology are essential to national resilience but require patient capital that can accept risks. With AI increasing energy demand, investments in nuclear power and electricity transmission could be prioritized.

International Investments

Strategic overseas investments could counterbalance China’s economic influence. For example, acquiring global port infrastructure would address America’s maritime vulnerabilities. While President Trump was able to spur BlackRock’s purchase of key Panama Canal ports from Hong Kong-based CK Hutchison without government investment, other priority assets could benefit from a SWF. Other areas of strategic importance include diversifying critical minerals, semiconductor and pharmaceutical supply chains, as well as loosening Huawei’s grip on telecommunications in emerging markets. A US SWF could enhance economic statecraft while earning a return by helping to fund infrastructure in partner nations that advance America’s interests and reinforces geostrategic alliances.

3. Management Model

A US SWF could either directly or indirectly manage its assets. It could also employ a mix of both.

Direct Management

A government-run SWF that directly managed investments would require investment expertise, clear decision-making structures, and safeguards against political interference. The SWF could incorporate the Defense Advanced Research Products Agency (DARPA) staffing model. If, for instance, rare metals were the priority, it could offer limited time opportunities to individuals with a metallurgical background. Norway’s SWF maintains an independence akin to the Federal Reserve, shielding it from politicization. Given the long-term nature of its investments, a SWF must be structured and operated in a way that enables it to operate effectively across political cycles.

Indirect Management

Alternatively, the SWF could contract private investment managers to oversee assets, following a model like US public pension funds. This approach would reduce bureaucratic inefficiencies but requires tightly defined mandates to prevent misalignment with national interests.

4. Legal Authorities

The effectiveness of a SWF depends on the legal authorities it is granted. It would need to be authorized to invest in a wide array of financial Instruments – equity investments, preferred stock, or convertible loans. To be most effective, it would have some authority to accelerate the resolution of permitting bottlenecks, particularly for critical infrastructure projects in the national interest (e.g., electric grid expansions). 

5. Funding Considerations

While a SWF holding government assets may be self-sustaining, funding a new one would likely require additional government borrowing, thereby increasing the deficit. Whether financed through Treasury allocations, diverted revenues (e.g., tariffs) that would otherwise have reduced the deficit, or debt issuance, SWF investments would at least initially add to the government’s debt. However, if strategically vital, such borrowing may be justified.

6. Enactment Options

A US SWF could either repurpose an existing entity or create a new one.

Repurpose an Existing Institution

Agencies like the Development Finance Corporation (DFC) or the Department of Energy Loan Programs Office already manage strategic investments, as do In-Q-Tel and OSC. The upcoming DFC reauthorization presents an opportunity to adjust its authorization to embed a SWF.

Create a New Entity

A bespoke fund would require legislative approval and significant administrative effort but could be tailored to long-term national objectives.

Conclusion

Ideally a US SWF would target specific needs of national interest that cannot be addressed by private markets without its assistance. It should fill investment gaps left by private markets, supporting strategic industries, infrastructure, and economic resilience. Its success depends on clear objectives, appropriate management models, required authorities and governance that prevents undo political interference by putting function first and politics second.