What is a treasure chest?
A sovereign wealth fund is a government investment vehicle. The general goal is to invest wisely in assets, such as stocks, bonds, and real estate, and get a good rate of return to grow the fund and strengthen the public finances. This idea has been around for a long time, although these funds first started operating in the 1990s. There are now more than 100 sovereign wealth funds in the world with assets of more than $10 trillion, according to the International Forum of Sovereign Wealth Funds.
Other countries have more, and just last year President Donald Trump ordered the creation of a fund managed by the US.
Paul Calluzzo, an associate professor at the Smith School of Business, said private equity funds tend to operate more like households that use more capital to invest. “The idea is that if you invest in the right way, you can have a lot more money than you spent today,” he said. “You can also spread that outbreak over time, so future generations can benefit as well.”
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But Caluzzo said the Canadian government’s goal is to make the economy stronger. “Creating more resilience may be investing not internationally, but domestically, in a way that makes Canadian industry more independent and self-sufficient,” he said.
Norway’s sovereign wealth fund has grown to the largest in the world, valued at around $2 trillion. It took money from North Sea oil production and invested it abroad in financial assets such as bonds and equity stakes.
Some sovereign wealth funds also have secondary goals other than generating returns. The Persian Gulf states are using their private funds to divest themselves of the fossil fuel industry, preventing them from economic development such as oil price fluctuations. The Norwegian fund supports its national pension system.
Where do they usually plant?
Jordan Eizenga, who leads Deloitte Canada’s infrastructure and real estate, said which sectors the private equity fund will invest in depends on the government’s overall goals and plans. “You can invest in renewable energy, you can invest in parts of the defense supply chain, you can invest in aviation—you can invest in whatever the country or the board feels is in its interest,” he said.
Canada’s new fund will be managed by a Crown corporation that will invest in domestic “strategic” projects—in areas such as advanced manufacturing, energy, and mining—and companies, according to a government background document. Ottawa will consult with Canadians in the coming months about specific aspects of the fund, Carney said Monday, adding that the main goal will be to “increase wealth for Canadians over time.”
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Caluzzo said private equity funds tend to invest in many of the same companies as individuals. “Norway has a small share of almost every publicly traded company in the world. So, it really spreads it to the public capital markets, but it’s not limited to the public markets,” said Caluzzo. “They can also invest in the private markets through things like private equity or private debt, or through direct infrastructure investments, which is very similar to what the Canadian fund seems to be aiming to do.”
How are they funded?
The majority of sovereign wealth funds are often derived from dedicated income streams, such as natural resource wealth. They may also be supported by foreign trade surpluses.
Carney said the federal government will invest an initial $25 billion in federal funds over three years to invest in domestic projects, as well as private investors. The prime minister said Canadians could invest in the fund, suggesting it would be similar to buying a government bond, where the initial investment is protected.
How is this fund different from funds like CPP Investments or Caisse?
Caluzzo said there are important differences between investment vehicles such as the Canada Pension Plan Investment Board and Quebec’s pension fund manager, the Caisse de dépôt et placement du Québec.
CPP and La Caisse are defined benefit pensions and contractual obligations to pay their beneficiaries. Canada’s new economic fund has a specific mandate to invest in domestic projects. But CPP and La Caisse have fiduciary obligations that compel them to stand out from the rest of the world.
Eizenga said it is better to think about a sovereign wealth fund with two goals: one to seek returns, and the other to develop the economy. CPP has a mission to achieve the best risk-adjusted return for pensioners, while La Caisse has a mission that involves the development of the Quebec economy.
“The way a private equity fund can differ from CPPIB is it will have more goals,” Eizenga said. “Those goals could be about improving Canada’s manufacturing capacity, developing certain industries, ensuring sovereignty, perhaps driving key industries that can make us more secure for the future.”
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