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| Strategic Investment Funds
NTMA Act 2014, simply states that the fund should invest “on a commercial basis in a manner designed to support economic activity and employment in the State.”23 ISIF’s 2015 investment strategy elaborated by providing a list of 10 eligible investment sectors, an indicative portfolio allocation by sector based on estimated funding gaps (which helped determine ISIF’s size), and commentary on the rationale for each sector’s selection (ISIF 2015). Box 5.2 provides a sense of the decision tree for SIFs focused on infrastructure as they identify the sectors of focus within the broad remit of the sponsor. Mixed capital SIFs whose investors include pension and other institutional funds may prioritize brownfield over greenfield investments. In general, pension funds opt to invest in large, mature operating assets that already yield cash flow.24 As a condition to investing in a SIF, institutional investors may therefore require the SIF itself to prioritize less risky assets. Such risk aversion may be heightened when a SIF is managed by a newly assembled investment team, as opposed to an external fund manager with previous experience. Conversely, free of such constraints, public capital SIFs have greater flexibility to pursue riskier investments on the asset maturity and income generation spectrum.
BOX 5.2
Investment strategy: Snapshot on defining investment scope for infrastructure SIFs For strategic investment funds (SIFs) focused on addressing infrastructure gaps, a rigorous definition of their infrastructure investment scope is an important component of the investment strategy. SIFs should consider the following parameters in defining the scope: • Identifying a range of subsectors: –– Infrastructure sectors with monopolistic characteristics (toll roads, ports, airports, utilities, water treatment facilities, power generation plants that sell power to utilities under offtake agreements). Projects in these sectors produce fairly predictable cash flows, driven by regulated tariffs paid by infrastructure users and long-term concession agreements (for example, the Marguerite funds and India’s National Investment and Infrastructure Fund [NIIF]). –– Infrastructure sectors exposed to competitive forces (telecom providers, merchant power plants, logistics and infrastructure services
companies). Competition exposes businesses in these sectors to a variety of risks, such as loss of market share or pricing power, which makes them riskier and more volatile investments (for example, Marguerite and NIIF). –– Enabling infrastructure, or sectors at the crossroads of services and infrastructure, which can contribute meaningfully to the overall economic development of a country (health care, education, financial services companies specializing in infrastructure). The Nigeria Sovereign Investment Authority’s Nigeria Infrastructure Fund has invested in private schools, cancer treatment and diagnostic centers (under public-private partnership models), an infrastructure debt fund, and an infrastructure bond guarantee company.a • Identifying stage of development—the extent to which, at the time of investment, the infrastructure assets are already constructed—and continued
