Strategic Investment Funds

Investment objectives. Successful achievement of an SIF's double bottom line requires that fund managers invest in projects that achieve competitive financial returns sufficient to attract investors across the risk spectrum, as well as economic policy objectives and associated economic returns. As discussed in section 6, when policy imperatives prevail over commercial considerations, SIFs may find it difficult to attract private capital even when they have good corporate governance. On the other hand, a fund that defines its policy objectives too loosely, focusing only on the maximization of returns, may end up making investments that would have taken place anyway, crowding out instead of crowding in private sector capital, resulting in a negative multiplier at the level of the overall economy. 

Performance metrics. The ERR is a comprehensive measure of the economic and social impacts of an investment project on society as a whole, and has been widely used by the public sector and the donor community as part of their economic analyses.  The tools used in the economic analysis of a project go beyond an ERR estimation, and can be used to answer broader questions about the impact of the project on the entity undertaking it, on society, and on various stakeholders. Economic analysis can also help to identify project risks and assess sustainability. However, none of the SIFs referred to in this paper use the ERR to assess investment opportunities, and none applies an explicit trade-off between financial and economic objectives. In practice, SIFs use a simplified approach: they assess investment opportunities that satisfy a financial return benchmark, against an economic benchmark frequently expressed as a proxy measure of the project's economic and induced impacts, such as employment creation, the stimulation of new firms, the reduction of carbon emissions, and other proxy variables of their policy objectives. For example, ISIF measures the social and economic contribution of the investment it undertakes through a variety of proxy variables, including employment, value addition at the enterprise level, and underlying investee turnover (see box 5), and publishes data on its economic impact every six months.  

SIFs often operate within a confined investment universe, that is, they invest only in certain sectors, themes, or asset classes predefined by their owners (for example, ISIF, AREF, GEEREF). A confined investment universe would, in principle, include the sectors and themes that are expected to contribute the most to the achievement of the SIF's policy objectives (that is, sectors that are expected to exhibit high ERRs). Beyond its simplicity, this approach has multiple advantages: it allows an SIF to tailor its organization (staffing and business processes) around a few, well-defined areas of expertise, and it facilitates the identification of meaningful and easy-to-understand proxy variables of economic impact.  

The use of proxy variables as substitutes for the ERR, although a common practice among SIFs, provides only a partial assessment of a project's socioeconomic impacts, and may be more open to selection bias than a more comprehensive economic analysis. Using the single measure of the ERR, albeit not perfect, may also facilitate the assessment of the relative desirability of projects with the same IRR and cash profile. For example, of two projects with the same IRR and cash profile, it would be difficult to choose whether to invest in the one that generates more exports or the one that reduces greenhouse gas (GHG) emissions. By estimating the ERR when possible and appropriate, an SIF could more easily compare alternatives with wide-ranging expected outcomes, and optimize the economic impact of its investment portfolio. This is particularly important when the number of investable projects is greater than the resources available to the SIF. Other indicators that capture unquantifiable impacts should also be considered.  

Economic analysis is an integral part of the investment decision-making process in public sector organizations and for IFIs. The experiences of these organizations could offer useful guidance to SIFs in designing ways to measure their double bottom line while preserving their private sector vocation.