Prime Minister Mark Carney announces the creation of the Canada Strong Fund in Ottawa on April 27.Justin Tang/The Canadian Press
I posted a short video last week explaining the sovereign wealth fund that Canada announced and the comments section blew up. The most common question was about whether a country with debt can create a wealth fund. “Isn’t that like buying stocks on a credit card?”
No. That’s a poor comparison.
Credit card balances may be subject to interest rates north of 20 per cent. Ottawa borrows at a fraction of that. A more apt analogy is to compare it to a household with a mortgage that also has an investment portfolio for the long-term, or uses a line of credit for a renovation. Yes, you can carry debt and invest at the same time.
But a better framework for judging the merits of a sovereign wealth fund may come from a December, 2024 Financial Review article.
The authors state that a national American fund would be unnecessary, fiscally unwise and politically difficult. And while Canada is not the United States, we can take the authors’ framework and apply it to the Canadian context for a more informed discussion.
When the federal government announced the fund on April 27, it said it would begin with a budget of $25-billion over three years. Plans call for it to be set up as a Crown corporation with an independent board and the mandate to invest alongside private capital in strategic Canadian projects and companies. The aim is to earn “market-rate returns,” while supporting nation-building projects.
Instead of asking whether sovereign wealth funds are inherently good or bad, we could address the three factors raised in the research paper. Is the fund necessary? Can it stay independent from politics? And does the fiscal math make sense?
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The first test is to establish necessity.
For the U.S., the authors argued that a sovereign wealth fund would duplicate what deep, efficient capital markets already do. The U.S. has massive venture capital, private equity, public equity and credit markets. Canada’s problem may be different.
John Ruffolo, managing partner of Toronto-based Maverix Private Equity, has made the sovereignty case for a fund: if we want Canadian-owned companies in more essential sectors of the economy, we need Canadian-controlled capital to help build them.
This may be the best case for the Canada Strong Fund. We have solid financial institutions but Canadian entrepreneurs and major projects often struggle to find enough long-term funding.
This can lead to companies scaling up with foreign money and, potentially, foreign priorities. If this fund fills that gap, the Canadian need for a sovereign wealth fund may be stronger than one for the U.S.
The second test is independence.
Globe business columnist Andrew Willis argued that Canada should look less to Norway, which Prime Minister Mark Carney referenced as inspiration when he announced the fund, and more to Quebec as a successful model. The Caisse de dépôt et placement du Québec is an investment group with a dual mandate to earn returns for its depositors and contribute to the province’s economic development.
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It’s allowed companies to scale up to a global stage without being taken over by foreign money. It also remained independently governed and hasn’t fallen into the trap of being raided when politically convenient, which historically can’t be said for the Alberta Heritage Savings Trust Fund. They now have plans to grow that fund to significantly higher levels going forward.
The third test is fiscal discipline.
The authors of the research paper didn’t suggest that a country with debt cannot create a sovereign wealth fund, but rather that the money seeding the fund has to come from somewhere other than surplus money.
In other words, the case has to be made that the money wouldn’t be better off paying down debt, reducing taxation or addressing other priorities. This ties in to the first test and where Canadians believe government allocation to nation building projects lies in the hierarchy of priorities.
There is one more wrinkle. This new fund may allow co-investment from individuals. Many Canadians have already been trying to buy more Canadian products, rethinking U.S. travel and redirecting spending closer to home.
A Canada Strong Fund may appeal to impact investors content with trading off higher potential returns in exchange for backing Canadian interests.
We still don’t have all the details on the proposed Canada Strong Fund, but the U.S. research provides a proper framework to evaluate its uniqueness. Does it solve a Canadian problem, will it earn a fair return for the risk it takes on and will it be allowed to behave like an investment or a political tool?
Preet Banerjee is the creator of YourMoneyDegree.com, a financial literacy program with an AI companion app.