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Don’t Go Chasing Sovereign Wealth Funds, Stick to the Development Finance Corporations That You’re Used To

Last fall, there seemed to be growing buzz in both Democratic and Republican circles around the idea of a US sovereign wealth fund (SWF). In September, then-candidate Trump called for the creation of an American sovereign wealth fund to invest in national development projects. Meanwhile, top officials in the Biden administration—then-National Security Advisor Jake Sullivan and Deputy National Security Advisor Daleep Singh—were reportedly sketching plans for a fund that would deploy capital for supply chain resilience and energy security. Then, near the end of the last Congress, legislation introduced in the House sought to establish a commission to study the idea of a national SWF.

This month, Bloomberg News reported that Elon Musk and Stephen Feinberg are leading discussions within the Trump administration for revamping the US International Development Finance Corporation (DFC) as an SWF. DFC, established by Congress under the first Trump administration, is the United States’ bilateral development finance institution, tasked with providing private sector finance in developing countries. With scant details, it’s hard to gauge precisely what the new administration has in mind, but as celebrants of DFC’s creation and close watchers of the agency, we have thoughts. Even amid (rare) growing bipartisan interest, there are big questions about the practicalities of emerging SWF proposals—including what resources would be used to capitalize such a fund, what investments it would support, where it might be housed, and the relevance of a SWF in the US context.

SWFs are traditionally set up to manage state-owned assets. There is a fundamental and unyielding reality with the potential to foil any of these ambitions: SWFs typically start with a wealth surplus. This can be in the form of windfalls from natural resource extraction, like oil and gas (i.e., Norway or the Gulf states), or foreign exchange from large trade surpluses (i.e., China). SWFs have diverse financial, economic, and political objectives: some are set up to provide a source of funds that can help a country cushion the impact of commodity-price volatility; some are meant to advance domestic economic policy; others are intended to be strategic investors abroad.

Surprisingly, the US already hosts 21 sovereign wealth funds at the state level; the largest are in Alaska, New Mexico, and Texas and are financed through the proceeds of oil, gas, and mineral revenue. They are primarily used to fund in-state programs like education and state government operations.

No comparable revenue streams at the federal level could be realistically used to capitalize DFC as an SWF. President Trump has suggested the potential of using revenues from tariffs—but, to date, these resources remain theoretical and have already been controversially cited as a potential source of offsets for tax cuts and other elements of the new administration’s agenda. Given the United States track record, a proposal that relies on hypothetical future budget surpluses is unrealistic. Tapping the substantial resources of the Defense Department sounds appealing, but given the Pentagon relies on annual appropriations from Congress, it’s hard to see a path forward. The Bloomberg story also suggests eyes on the Defense Logistics Agency—tasked with managing certain strategic and critical minerals in the National Defense Stockpile (NDS)—which can retain proceeds from the sale of excess materials in a revolving fund. But, according to FY25 budget documents, the NDS Transaction Fund has been “insufficient to fully finance the program” in more recent years, forcing the agency to seek appropriations.

The funding question is critical because most national sovereign wealth funds are enormous. Global sovereign wealth funds have over $12 trillion in assets. The Norwegian Pension Fund has $1.7 trillion in assets, while China’s combined sovereign wealth funds have over $2.5 trillion.

DFC has a long way to go to match the financial firepower of the biggest SWFs. The agency currently manages a portfolio of nearly $50 billion in investments—nearly double that of its predecessor, the Overseas Private Investment Corporation (OPIC), but still a drop in the bucket if there is any aim to compete at scale with the other major players.

Finally, SWF are independent financial entities. While SWFs are owned and operated by governments, they tend to operate as standalone institutions. They have their own balance sheets, investment strategies, and staff. One of the appeals of the SWF model is that it would allow the United States to pursue big investments at scale without going through the regular political hoops. But this may be a deal-breaker for Capitol Hill—which has repeatedly balked at allowing DFC to retain its reflows or earnings, preferring the control that comes with annual appropriations. This current state of play is hard to reconcile with the relatively higher level of financial autonomy that many SWFs enjoy.

This is not to say we don’t think DFC should have some SWF-like features. To the contrary, we like ambition. We agree DFC should be bigger. The House DFC reauthorization bill introduced last year is a good place to start: it would have doubled DFC’s investment portfolio cap to $120 billion, putting DFC on a glide path to rivaling the World Bank Group’s International Finance Corporation as one of the world’s largest development finance institutions. The measure also would have provided a much-needed fix to the budget treatment of DFC’s direct equity investments, enabling the agency to make better use of this critical instrument. We also see merit in a larger strategic rethink of DFC’s balance sheet and whether there is a case for DFC to operate with more independence including where it could reinvest its profits and accumulate its own capital.

But there’s also the fundamental point that SWFs aren’t development finance institutions. DFC seems caught in a perpetual tug-of-war—lawmakers are eager to direct the agency to invest in specific regions and sectors while each administration brings its wishlist. What we hope won’t be left out of the discussion is where DFC’s resources are most needed to mobilize private capital. We fully expect US strategic interests abroad to move up the proverbial priority list under the Trump administration, much as the agency was urged to go big on climate finance under President Biden. But there’s a risk of setting too many objectives and unrealistic goals that could swamp a still-young agency. DFC’s predecessor, OPIC, was subject to a number of the same machinations over the years and ultimately fell out of favor, facing charges of politicization and corporate welfare. On Capitol Hill, a coalition of critics from both sides of the aisle came close to killing OPIC in the mid-to-late 1990s, and for years, the agency had to rely on reauthorizations of a year or less.

Indeed, there are reports that the agency is being discussed as a possible vehicle for a Panama Canal or Greenland transaction. Talk of rebranding DFC as an SWF is likely more about form than content, intended to relabel the agency as a national security vehicle. What gets lost in the mix is the economic development mission that the institution was created to pursue—and the history that argues straying too far from its core directives could spell danger for a recent bipartisan policy win.

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.


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