Strategic Investment Funds
The number of government-sponsored SIFs has grown rapidly over the past 15 years, opening new opportunities to crowd in private capital to infrastructure PPP projects/funds and SME funds. SIFs are designed to achieve a wide range of policy objectives, some of which may be country and context specific. Some SIFs invest only domestically and are owned by both the public and the private sector, whereas others are wholly owned by a government. Some SIFs operate at the global or regional level, and may be funded by several governments.
Notwithstanding their diversity, all SIFs aim to crowd in private capital. This is achieved at the fund level by engaging as a limited partner in hybrid funds, by investing in other funds, or at the project level through co-investment and/or the use of various return-enhancing and de-risking instruments. Investing with the private sector allows the public sector to generate a multiplier effect, which can range from 1:12 for a typical SIF's direct investment to 1:70 for a hybrid fund-of-funds. The size of an SIF's capital multiplier does not reflect its ability to operate efficiently, or the wider social economic impacts of its investment. But it does provide a measure of market validation, which is a critical success factor.
SIFs' sources of funding may include balance-of-payment surpluses, official foreign currency operations, the proceeds of privatization, pension reserve funds, receipts resulting from commodity exports, and also contributions from IFIs and private sector actors. Partners that have a high credit rating or that borrow from IFIs can on-lend to an SIF at low cost. In this case the SIF can, when necessary and justified by policy objectives, take advantage of the margin between low-cost loans and the expected risk-adjusted returns on its investments to enhance returns for private investors or de-risk their investments.
SIFs face common challenges. Whatever their country of operations or area of investment, they all need to reconcile (and appropriately measure) policy and commercial objectives by achieving attractive returns on their investments while delivering meaningful social and economic impacts. Based on publicly available information on the objectives, strategies, and operations of a sample of SIFs, this paper has identified some of the challenges that are implicit in the SIFs' dual objectives, and has outlined ways in which SIFs have addressed them.
When policy imperatives prevail over commercial considerations, SIFs may find it difficult to attract private capital even when they apply good corporate governance principles, and are domiciled in a country having good regulatory quality, rule of law, and overall institutional quality. Sourcing investable projects may also be difficult, particularly where lack of capacity and information asymmetry hinder the preparation of a welldocumented pipeline of bankable projects. Sourcing projects from the national budget may provide the opportunity to align the SIF strategy to the development priorities of the country of operations. SIFs' close relationship with government makes it easier for these funds to source their projects from the national development plan, and other government-related project pipelines must not hinder the ability of the SIF to make fully independent viable investment decisions.
To be able to operate as expert investors, SIFs need to secure and retain professional staff with knowledge and skills on generating value, the ability to read and interpret market trends and quickly act on them, and access to an extensive network of contacts. Co-investing with experienced private sector investors can provide an SIF with both market validation and additional expertise, to enhance the quality of investment decisions and fast-track its staff's learning curve. An SIF's ability to offer staff benefit packages beyond those available through standard public sector salary regimes is also critical to attract and retain highly skilled investment managers.
Notwithstanding their growing number and relevance to policy making, SIFs have not yet been the subject of in-depth analysis in the literature. This paper has made a first attempt at recognizing their unique features, categorizing them on the basis of their investment strategies, and identifying common challenges to their success – as well as ways to address these challenges.