What Is a Strategic Investment Fund?

What Is a Strategic Investment Fund

The past 15 years have seen the rapid proliferation of strategic, government-sponsored investment funds that, in addition to generating returns for their investors, are tasked with catalyzing capital flows to priority sectors of national and regional economies. Their role goes far beyond the provision of public capital. Well-managed strategic investment funds (SIFs) can create opportunities for attracting private investment, deepening domestic capital markets, and building the capacity of governments to act as professional longterm investors. At their best, SIFs bring highly specialized and sector-specific expertise to the structuring and financing of investment projects. Their presence as co-investors provides some degree of implicit political and regulatory risk insurance for private investors, particularly for infrastructure projects, which are generally more exposed to sovereign risk.

However, a review of the existing literature suggests that the establishment and operation of SIFs are not without challenges. The efficient operation of these funds requires a high level of fund management capacity, independence, and transparency. To be successful, SIFs need to balance policy and commercial objectives,

source investment opportunities well and secure the right staff. Although SIFs have been around for a few decades, they have not until now been the object of analysis in the literature.

Section 2 proposes a definition and classification of SIFs based on their investment strategy. Section 3 identifies factors that may explain their recent proliferation, while sections 4 to 7 focus on their structure, strategy, role, and operations. Section 8 identifies common challenges and proposes possible solutions based on the experience of a wide range of existing SIFs. Section 9 concludes.

What Is a Strategic Investment Fund?

This paper defines SIFs as special purpose investment funds that exhibit all of the following six characteristics. These funds:

 Are sponsored and/or fully or partly capitalized by a government, by several governments, or by government-owned global or regional finance institutions;

 Invest to achieve financial as well as economic returns, in accordance with a double bottom line;

 Aim to crowd in private capital by co-investing at the fund and/or project level;

 Operate as expert investors on behalf of their sponsors;

 Provide long-term patient capital, primarily as equity, and may also invest in quasi-equity or debt; and

 Are established as investment funds or investment corporations.

Appendix A contains a non-exhaustive list of SIFs categorized according to their geographical scope.

SIFs come in different flavors. Their investments tend to focus on infrastructure projects and/or funds, but

may also include investments in private equity (PE) and venture capital (VC) funds for small and medium enterprises (SMEs). A useful categorization of SIFs can be derived from research carried out by Clark and Monk (2015) on sovereign development funds, which the authors define as publicly sponsored commercial investment funds that combine financial performance objectives with development objectives. The authors suggest four operational and not mutually exclusive strategies for sovereign development funds: (i) reinforcing, by reorganizing, professionalizing, and innovating state holdings (companies, infrastructure, or other real assets) so as to drive commercialization and higher returns; (ii) crowding in private capital, by acting as a cornerstone investor in key sectors or projects; (iii) catalyzing, by seeding new industries, thereby diversifying the economy away from industries that are no longer profitable or sustainable over the long term; and (iv) financialized, by deepening local financial markets, thereby underwriting the development process through the growth of the capital market and the emergence of new financial intermediaries and investors focused on opportunities in the region. Each of these strategies is situated along a double spectrum, from strategic to commercial in terms of investment objectives, and in tight or loose alignment with national endowments and advantages.