Sovereign Development Funds: Designing High-Performance, Strategic Investment Institutions

Abstract

In a slowing global economy with diminished confidence in the long-term prospects for public financial markets, many institutional investors are looking for innovative, alternative, and often private, investment strategies to meet elevated expected return targets. One source of potential inspiration has, perhaps surprisingly, come from the community of sovereign development funds. SDFs are strategic, government-sponsored investment organizations that have dual objective functions: to deliver high financial performance, while fostering development. Despite an expectation that this dual objective function inevitably leads to financial underperformance, SDFs have actually delivered consistently high investment returns, especially in private markets. As such, SDF strategies are increasingly being used as a model for investment strategies among non-developmental investment organizations. In this paper, then, we explore the rise of SDFs, account for some of their outsized performance and conceptualize models for SDF governance and management. Our intention is to provide a flexible blueprint for governments or agencies seeking to establish these funds, but our insights are also intended for all institutional investors looking for new ways to generate ‘alpha.’