Sovereign wealth funds (SWF) are becoming a more powerful force in foreign direct investment (FDI). 

The growing trend of SWFs taking direct ownership of unlisted foreign assets is in stark contrast to their historical role of investing surplus government revenues in public markets. But it is concentrated among a handful of the world’s biggest funds, which can afford to hire enough sector specialists, with a big enough geographical reach, to manage these investments themselves. 

SWFs lacking the scale to invest directly abroad, however, are embracing another FDI strategy. They are de-risking inbound investment by foreign institutional investors and firms. These SWFs have become known as ‘catalyser funds’, as they work to crowd foreign capital into local greenfield projects and businesses. “It’s a sort of FDI vehicle where they want to make sure that there is more capital coming into the country,” says Diego López, managing director of Global SWF.

Skin in the game

The idea is that the local SWFs’ involvement unlocks investments that would normally be outside the foreign investor’s comfort zone. This is largely driven by the local fund’s capital commitment. “The government [putting] some skin in the game shows it is an important project that will get the necessary visibility, provides comfort that permitting and licensing will go smoothly, and reduces investment risks by covering some of the equity needs,” Manuel de la Rocha-Vázquez, secretary general for economic and G20 affairs at the office of Spain’s president, told fDi in January when describing the rationale behind the new €2bn co-investment fund Foco managed by its SWF Cofides.  

Catalyser funds also bring the comfort of local knowledge. SWF Bpifrance has used the co-investment model since 2019 and has facilitated inbound investments from the likes of Mubadala and Qatar Investment Authority. With the latter, it created a 50:50 joint venture called French Future Champion to co-invest in French small and medium-sized enterprises. Its investments include a €250m funding round in 2022 for insect producer Innovafeed. “It’s really reassuring for [other SWFs] to invest with us, because we have an in-depth knowledge of the French economic fabric,” says Isabelle Bébéar, Bpifrance’s director of international and European affairs.

In Asia, a new cohort of catalyser SWFs focused exclusively on attracting FDI is emerging, too. These include India’s National Investment and Infrastructure Fund (founded 2015), the Philippines’ Maharlika Investment Fund (founded 2023) and the Indonesia Investment Authority (founded 2021). In January, the latter partnered with ADIA and APG to set up the country’s first toll road investment platform which, over time, will invest $2.75bn. 

Even in Africa, catalyser SWFs have seen success. Senegal’s Fonsis partnered with French asset manager Meridiam to establish Dakar Mobilité — owning 30% and 70%, respectively — which is electrifying Dakar’s bus fleet. They also partnered on the country’s 29.5-megawatt solar project Ten Merina in which Meridiam is the majority shareholder. 

Meanwhile Saudi Arabia’s PIF, which is also engaged in outbound FDI, is working to attract investment and tech transfer into the country by partnering with foreign corporates on inbound deals. Last year it formed a $550m joint venture with Italy’s Pirelli to create a “regional champion” for tire manufacturing and technology in Saudi Arabia. 

Political risks

Funds designed to attract foreign capital are the fastest growing segment within the SWF universe. According to Global SWF, of the 17 SWFs established since 2020, eight are catalyser funds. Paul O’Brien, former deputy chief investment officer at the Abu Dhabi Investment Authority, sees their proliferation as another facet of industrial policy’s renaissance. “The intellectual climate today is that the state can and should try to play a role in allocating capital,” he says. 

But as with other forms of industrial policy, such as subsidies and FDI screening, SWF co-investment is not without risk: namely, enhancing government ownership of private sector assets. Every catalyser fund fDi has spoken with stresses that it only takes minority stakes. But Patrick Schena, a professor at Tufts University who co-heads its Sovereign Wealth Fund Initiative, says a government investing domestically in the private sector begs several questions. “Where do the projects come from? Are there political motivations to invest in certain places? Do political cycles accentuate the motivation to invest through some of these vehicles? Foreign investors want no part of that. So proper governance, and distance from political influence, becomes important," he says. 

Compared to the watershed FDI announcements being made by the Gulf and Singaporean SWFs, the work being done by catalyser funds has taken on a lower profile. But given their lower barrier to entry, in the long term they may become SWFs’ most powerful force in FDI.

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