Investment Process
Some SIFs conduct screening and due diligence in different phases, with increasing staff commitment (in number or seniority) at each stage. In funds with a separate risk team, that team may be involved in the screening process from the early stages, as discussed in the previous chapter in the section on risk management. The SIF usually engages external advisers—such as legal, accounting, tax, and other consulting firms—to support specific aspects of due diligence. At the end of the evaluation process, the investment team summarizes its findings and recommendations in an investment memorandum, which is submitted to the SIF’s decision-making body (for example, the investment committee or board) as the basis for investment approval or rejection. The investment memorandum not only provides a written record of the information considered in the evaluation process but also contains the core investment thesis against which the success of an investment will be measured during regular reviews (Invest Europe 2018). If the decision-making body requires further analysis and evaluation before a decision, revisions of the investment memorandum may be necessary (Invest Europe 2018). Figure 6.2 shows the example of NSIA-NIF, which conducts three levels of sequenced analysis before an investment is presented to the NSIA board for approval. The purpose of in-depth investment due diligence—in PCFs and SIFs alike— is to obtain an in-depth understanding of the target company’s prospects, the investment risks, the potential for financial returns, and ultimately the exit opportunities for the fund. Areas of investigation during the due diligence process include, subject to industry-specific adaptations (Invest Europe 2018), the following: the financial position of the target company; the quality of its management team; the sector(s) and geography(ies) of operation; technology and research and development efforts; protection of intellectual property rights; important regulations affecting the business; contractual arrangements with customers, suppliers, and other counterparts; pension liabilities; environmental, social, and governance (ESG) considerations; litigation risks; and insurance coverage. During due diligence the investment team also tests the company business plan’s assumptions and evaluates investment risks and return prospects. The SIF’s investors, regulators, and other stakeholders, as applicable, may require the team to carry out further checks, for instance, to ensure that the
FIGURE 6.2
NSIA-NIF investment evaluation process and responsibilities Investment team
Executive committee
Direct investment committee
NSIA board
• Conducts due diligence and analysis of investment opportunities
• Screens deals on the basis of compliance with NIF’s mandate and return targets
• Screens deals to be submitted to NSIA board for final decision
• Approves deal
• Presents deal to executive committee
• Presents deal to investment committee
• Makes majoritybased decision (but seeks consensus)
• Makes majoritybased decision (but seeks consensus)
Source: World Bank; see NSIA-NIF case study in appendix A. Note: NSIA-NIF = Nigeria Sovereign Investment Authority – Nigeria Infrastructure Fund.
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