When governments go down the route of creating their own national ‘Wealth Funds’, such instruments contain the accumulation of surpluses that are subsequently invested into often relatively safe assets so that the fund appreciates over time in the interest of citizens and taxpayers.

Those created by Singapore, Saudi Arabia and Norway are model examples, currently with $770 billion, $720 billion and $1.4 trillion in assets under management (AUM) respectively, depending on market performance.

So, when the U.K.’s recently elected Labour party government announced the creation of the country’s wealth fund within days of taking office in July, the move generated a lot of interest only for it to fizzle out just as quickly, once the market got hold of the details.

According to the U.K. Treasury, the fund will have an initial capital base of £7.3 billion ($9.7 billion) on the back of a merger of the British Business Bank and the UK Infrastructure Bank. Rather than a surplus, which the U.K. doesn’t have, the fund is financed by money borrowed by a government that is heavily overdrawn on its current account to facilitate state investments.

Treasury officials are indeed keen to point out the U.K. government isn’t “doing a Norway.” For starters, that ship sailed back in the 1970s when neighboring Norway chose to invest its oil and gas windfall from the North Sea, while the U.K. channeled its own into government coffers for general day-to-day expenditure.

What Could Possibly Go Wrong?

Set aside the wealth preservation element, even if investment is at the heart of both funds – the strategy of the British fund appears to be likely risky and one-sided. For instance, the Norwegian fund’s investment is spread over nearly 10,000 companies in almost 80 countries, but U.K. chancellor Rachel Reeves’ vehicle is going to focus only on one risky asset class – ‘industries for the future‘.

So, we’re talking things like green steel made using hydrogen from renewable energy rather than coking coal as a reducing agent, hydrogen production from electrolysis of water, carbon capture and storage, etc. – the sort of technologies the U.K. needs supposedly urgently to get near its 2050 net zero greenhouse gas emissions target.

The basic idea driving the fund – using public money to take on riskier investments acting as “catalyst” capital – is not new. It seems the Labour party is hoping against all hopes that a £7.3 billion investment by the government will attract a further £20 billion to £30 billion from the private sector.

It’s not about investing in more wind power, even though the U.K. Treasury used that illustration, making people wonder that even it does not understand what the fund is meant to do.

That will be left to a yet-to-be clearly defined GB Energy with a £8.3 billion war chest. It is another one of the Labour government’s new vehicles that will not supply power to British homes, but will “help fund new and existing cleantech, as well as renewable energy projects,” according to a spokesperson.

Need For Higher Risk Appetite

The wealth fund for its part will expect a return for the taxpayers based on its own cleantech investments. However, the question to be asked here is why the U.K.’s private sector isn’t already investing ‘in industries of the future’ if they happen to be such sterling opportunities.

That’s because investing in cleantech requires a stiff resolve, bundles of patience and a higher-than-average risk appetite. At least that was the verdict of many at Gastech 2024, one of the energy industry’s largest conferences that concluded in Houston, US on Friday, with an entire conference stream dedicated to cleantech.

Delegates at the event wondered why the U.K. government was basing a new wealth fund on money borrowed by the state to invest in risky new technology ventures “many of which will fail while others will have uncertain returns, taking years to recoup” requiring a resolve and risk appetite typically not associated with taxpayer funds.

Some already in the sphere offered some color on what it takes to invest in such technologies. For example, Aramco Ventures – a $7.2 billion venture capital arm of Saudi Arabia’s state-owned oil and gas behemoth Aramco. It is investing via five funds in several cleantech projects and firms.

Mahdi Aladel, CEO of Aramco Ventures, noted: “We are operationally prepared to accept that only 1 in 10 of our investments may succeed and that venture too would require patient nurturing on its path to commercial success.

“This may take a considerable amount of time. It is something we are comfortable with, safe in the knowledge that wider Aramco commercial expertise in the energy sector can come into play at the right time.”

It is questionable that the U.K. government or the Labour party has that kind of expertise which will likely be outsourced. It has offered a new task force to oversee such investments led by the former governor of the Bank of England, Mark Carney. The move, while not eliciting any vocal criticism, did not fill anyone at Gastech with any sense of confidence either.

Many also noted that the promise of £7.3 billion is “substantially less money” than many private investment firms operating in sphere typically put on the table. “These firms have a 10 to 20-year investment horizon. The U.K. fund will likely not make the promised returns in a two-decade time-frame and will suffer near-term pain. The Labour party most likely know this and that they may not be in power that long to face the consequences of it,” said one industry expert.

Another suggested that Labour’s technocratic government might well have called their investment vehicle a “wealth fund” but its inspiration has been drawn from government-backed schemes such as France’s Agence Française de Développement (AFD), Germany’s Klima- und Transformationsfonds (KTF), and Canada’s Growth Fund – that provide financial support for climate protection and energy supply.

But inspiration will not protect a differently structured U.K. vehicle from risks faced by cleantech enterprises if the experience of a much larger U.S. market is anything to go by.

Earlier this month, the Financial Times reported that U.S. cleantech businesses that had raised hundreds of millions of dollars from SoftBank, Amazon and other big investors are closing, while other green companies – including some touted by President Joe Biden’s administration – are struggling to survive.

“Start-up cleantech businesses that easily raised money from venture firms just two or three years ago are now finding it harder to get hold of fresh cash. Stung by high interest rates and some delays from federal tax credit support, cleantech businesses have found that winning investments from private equity and infrastructure funds has become more difficult,” the paper noted.

In such a climate, it would be wishful thinking that the U.K.’s new fund or pseudo-policy bank will not be hostage to fortune or attract several multiples of its own investments from the private sector. It will bring in at best lukewarm benefits and negligible returns for taxpayers over a long drawn out period. And whatever it might eventually turn out to be – a classic wealth fund it certainly won’t be.