Investment Process
In public capital SIFs, senior members of the investment team will most likely drive the definition of the investment process, subject to ultimate approval by the SIF’s public sponsor. The investment process is usually formalized in the same d ocument as the investment strategy. Mixed capital SIFs will formulate the investment process in a private placement memorandum; public-capital SIFs will lay out the investment process in ancillary documentation to the establishment act, as determined by a country’s jurisdiction and the fund’s legal framework.
INVESTMENT ORIGINATION Investment origination, one of the core functions performed by the SIF’s investment team, consists of sourcing potential investments that fit the fund’s financial and economic return goals. A SIF’s origination process, although sharing commonalities with that of PCFs, also presents distinctive features because of the SIF’s affiliation with the public sponsor and potential to unlock opportunities through that affiliation. The following discussion first describes the origination routes common to SIFs and PCFs, and then focuses on those distinctive to SIFs. SIFs rely on a variety of routes, also common to PCFs, to originate investments. These routes include the following. • Passive sourcing. Potential investments are presented to the SIF by financial intermediaries, such as investment banks, which approach potential buyers on behalf of a company’s shareholders (sometimes in the context of a formal auction) (Bain & Company 2017), or by other funds seeking co-investors in deals they have identified.2 The SIF’s credibility as a professional market operator and its track record of closing deals will increase its chances of being approached by such intermediaries. • Proactive sourcing. The fund self-generates potential investment opportunities—often referred to as proprietary deals—leveraging the expertise and network of its investment team and formal and informal advisers, and its presence on the ground in the target market.3 For example, in 2016, Singaporean SIF Temasek created formal advisory panels consisting of well-connected senior executives in Europe and the United States4 to seek investment opportunities and advise on activities (Temasek 2016; Wells 2016). Proactive sourcing through tapping into institutional or temporary networks5 may provide a fruitful origination route for newly launched SIFs focusing on investments overlooked by existing investors and intermediaries. Funds can also source additional investment opportunities by partnering with corporate acquirers that can share the benefits of their market position, infrastructure, potential synergies, and industry experience in return for a SIF’s financial firepower and network.6 • Cross-pollination, a derivative of proactive sourcing whereby the investment team seeks to replicate successful investment theses and structures in new sectors or geographies (compatible with the fund’s target universe). Collaboration and communication across the different sectoral and geographic teams of a fund will contribute to successful cross-pollination (Bain & Company 2017).
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