Strategic Investment Funds

Good governance. For an SIF to be an attractive investment target or co-investor for private investors, it needs to be first and foremost a credible investor. For many investors, corporate governance has become one of the key factors in the investment decision‐making process. For example, 1Malaysia Development Berhad (1MDB), an SIF set up in 2009 to turn Kuala Lumpur into a financial hub, started to attract national attention in early 2015, when it missed payments of $11 billion (£7.1 billion; €9.9 billion) that it owed to banks and bondholders. A series of probes and investigations exposed its weak corporate governance. These findings crippled the SIF's credibility and its ability to attract investors. From the perspective of an SIF, it is therefore very important to incorporate solid corporate governance mechanisms in legislation that establishes an SIF, as well as in the SIF's bylaws and other policy and procedural documents – and to make such documentation available to investors. Sound corporate governance arrangements define clear mandates and objectives, provide incentives for the SIF's board and management to pursue shareholders' objectives, and facilitate the monitoring of performance by shareholders and owners. This is particularly important for SIFs and other state-sponsored institutions where clear policies and mechanisms are required to deal with complex mandates combining financial and public policy objectives. Strong corporate governance – in particular, clear separation between the ownership role of the government or other sponsors, the oversight role of the fund's board, and the fund manager's independent role in decisions on investment and exit – help to ensure efficiency and accountability. Transparent and timely reporting of accounting information, and strong external audit systems, help increase the market credibility of an SIF, particularly when the fund engages in PPPs.  

SIF structure. Hybrid SIFs – that is, SIFs that are funded by both public and private capital – provide a high degree of market validation, and are likely to generate a high overall multiplier. Since private sector participation occurs at the fund level, hybrid SIFs are likely to exhibit competitive financial returns. The PINAI, the AREF, and the REAF are examples of the hybrid model.  However, an external manager may not have a natural incentive to pursue high multiplier effects at the project level, since this is likely to result in more complex and time-consuming transactions that will not necessarily correspond to a higher return to the SIF's own share of project capital. Linking the external manager's remuneration to the achievement of a multiplier benchmark may mitigate this risk. For fully state-owned and/or managed SIFs, limiting the SIFs' investment to minority participation can provide market validation of projects and enhance the integrity of investment decisions. In this way, due diligence by private sector co-investors can confirm the profitability of investee projects or companies.  

Domiciliation. The jurisdiction in which the fund is domiciled may affect investors' perception or assessment of the integrity of a fund's activities, since such integrity is in part determined by regulatory quality, rule of law, and overall institutional quality in the country of domiciliation. Recognized international financial centers with strong legal, regulatory, and supervisory standards for fund operations may help to enhance investors' confidence. International SIFs, such as AREF, GEEREF, or Asia Climate Partners, tend to be domiciled in known jurisdictions with attractive and cost-efficient regulatory frameworks, such as Luxembourg, Mauritius, and Singapore. Tax optimization is another key factor deciding domiciliation.  

SIFs that invest exclusively in the domestic market are normally domiciled in the country of operations, independent of their shareholding structure. This is likely related to these SIFs' need to attract domestic institutional investors as well as taxation, and the home governments' desire for a certain level of control over the funds. Where appropriate, dual registration could be considered, for example, to provide some degree of insulation against undue political interference in investment decisions – the biggest threat for any SOE – and in the resolution of investment disputes.