Updated February 13th, 2024 at 16:44 IST

Why Sovereign Wealth Funds are booming? All you need to know

Abu Dhabi Sovereign Fund has emerged as the first sovereign fund to announce a big investment in GIFT City.

Rajat Mishra
Diversified Investments: Beyond real estate, Indian funds flow into IT services and business services sectors, with $10.5 million directed to greenfield projects by Q2 2023. | Image:Unsplash
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Booming Sovereign wealth funds: Prime Minister Narendra Modi is all set to address a gathering of people in the United Arab Emirates (UAE), marking his seventh visit to the UAE ever since he took over as the Prime Minister. It was just a few days ahead of his visit when Abu Dhabi Sovereign Wealth Fund announced an investment to the tune of Rs 4-5 billion in PM Modi’s ambitious Gift City which is called the gateway to global investment.  Abu Dhabi Sovereign Fund has emerged as the first sovereign fund to announce a big investment in GIFT City.

What are sovereign wealth funds?

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A sovereign wealth fund is a state-owned investment fund comprising money generated by the government, often derived from a country's surplus reserves. They may be funded by foreign exchange reserves, the sale of scarce resources such as oil, or general tax and other revenue.  Some of the largest SWFs include the Abu Dhabi Investment Authority (ADIA), the Norway Government Pension Fund - Global, the Government of Singapore Investment Corporation (GIC), the Kuwait Investment Authority (KIA), and the Saudi Arabian Monetary Authority (SAMA). 

Simply, domestic surpluses are used by these countries as a vehicle for investing in international markets to generate robust financial returns. In the last few years, Sovereign Wealth Funds have become the talk of the town and have established themselves as critical long-term global investors. 

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According to the World Economic Forum, as of February 2023, assets under management of sovereign wealth funds globally stood at $11.3 trillion, ten times more than what was invested 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,” the World Economic Forum stated in an article.

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Which are the top Sovereign Wealth Funds as of now?

According to Reuters ranking, Government Pension Funds Global is the largest sovereign wealth fund owned by Norway and has assets of around $1058.05 billion under management. Second on the list of largest sovereign wealth funds is China Investment Corporations with assets under management standing at $941.40 billion owned by China. Third is Abu Dhabi Investment Authority with assets under management standing at a whopping $683 billion owned by the UAE. Followed by UAE is the Kuwait Investment Authority which has assets worth $592 billion to date. 

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Why India is not having its own Sovereign Wealth Funds? 

It's widely known now, that nations with a budgetary surplus go for creating SWF. The first one was created by Kuwait way back in 1953 to invest excess oil revenues. According to Chartered Alternative Investment Analyst Association, it is estimated that there are more than 175 SWFs today which have close to $12 trillion in assets under management (AUM). Of these the largest 10 SWFs own close to $8.5 trillion in AUM. India as an economy does not have a budgetary surplus and thus has no SWF. The nation has a fiscal deficit of around Rs 17 lakh crore. So, the task in front of the Indian economy is to bridge the deficit through borrowing. 

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Are these funds going to grow?

The study conducted by Invest in Spain showed how sovereign funds have navigated the changes and challenges between January 2022 and March 2023. According to them, in a scenario marked by geopolitical tensions, supply chain disruptions, inflation, historically high-interest rates and mixed performance in financial markets in general, sovereign funds have seen an 11 per cent increase in assets under management (AUM) to $11.6 in 2022, from $10.39 trillion in 2021, and have diversified away from technology.

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Published February 13th, 2024 at 14:54 IST