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Sovereign Wealth Fund (SWF)

Definition - What does Sovereign Wealth Fund (SWF) mean?

A sovereign wealth fund (SWF) is an investment fund that is owned and operated by the state with a purpose to protect or boost the national economy. Its funding comes from government sources such as surplus in balance of payments, proceeds from privatization of one or more public sector entities, receipts from exports, governmental transfers and more.

Divestopedia explains Sovereign Wealth Fund (SWF)

Every SWF has its own unique purpose and objective, but the general aim is to do something that will benefit the country as a whole. Some possible objectives include:

  • Fund social or economic projects to boost growth and employment.
  • Get political mileage and increase vote share.
  • Provide long-term capital growth opportunities for the domestic market.
  • Protect the economy from excess volatility due to revenues or exports.
  • Provide stability against oil price fluctuations.
  • Diversify portfolio with an aim to create savings for the future generation.

Based on the nature and objective of the SWF, it can be broadly divided into three vehicles: public pension funds, state-owned entities and sovereign wealth enterprises (SWE). The operations and transparency levels of each of these three vehicles vary. Some are more transparent and they disclose their holdings over every quarter while others may prefer to stay private.

Sovereign wealth funds invest in a wide range of asset classes including:

  • Public investments, such as securities, that trade on exchanges or over-the-counter markets, specifically public equities and fixed income; and
  • Private investments that do not normally trade on exchanges, such as real estate, infrastructure, private equity and natural resources.

SWFs are becoming a more prominent participant in direct investment of privately held middle market businesses as they search for higher returns in the asset portfolio.

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