Challenges to establishing a SIF

SIFs also cannot bind future administrations to honor the establishing government’s commitment to the institution or its mandate, and they must strategically buffer against political headwinds to come (Environmental Audit committee 2011).38 This is a key risk that SIFs have to manage strategically, such as through long-term external partnerships and alliances that can buffer the attempt of future governments to prematurely dissolve a SIF. Governments would likely balk at severing alliances or co-investments from multilateral bodies or other SWFs, making such partnerships particularly valuable to the longevity of a SIF. It is therefore striking to observe SIFs such as the nIIF actively cultivating such relationships with both multilaterals and SWFs: to date, nIIF has received investments from SWFs like the Abu dhabi Investment Authority and Temasek, as well as from multilaterals like the Asian development Bank and Asia Infrastructure Investment Bank. Public capital SIFs set up by one government, by contrast, are more exposed to political risk.

CHALLENGES TO ESTABLISHING A SIF

SIFs are complex entities because they sit between providers of public and private capital, and because they can exhibit properties of SWFs, SOEs, and private capital funds. Their proximity to the sovereign or quasi-sovereign entity allows SIFs to operate in a commercial space while still having some of the privileges of this affiliation, such as being able to provide regulatory feedback to governments. Public capital SIFs exhibit properties of SWFs because they are investment agencies of the sovereign and their activities must be consistent with overall macroeconomic policies of the country, as discussed earlier. They also exhibit properties of SOEs because their mandate is shaped by a public policy purpose such as better infrastructure. All SIFs have properties of private equity funds because they typically take direct investment in unlisted assets and are usually active investors that require board seats and can mobilize or crowd in capital from other investors.

SIFs are subject to higher public standards because of their affiliation with the sovereign, and public capital SIFs are often part of complicated authorizing and regulatory environments. Being a state (or quasi-state) actor investing public funds changes requirements and expectations for transparency and disclosure as well as the perception of risk. Proximity to the sovereign elevates reputational risk of the SIF beyond the risk of poor financial returns because sovereign or quasi-sovereign entities are held to higher public standards of responsible investment. The operational independence of the public capital SIF may be subject not only to its constitutive documents but also to the existing authorizing environment for SOEs. SIF regulatory frameworks may derive from both the establishment documents and the rule books for both private investment agencies and SOEs (see box 2.5 for the example of china). In a country without centrally codified SOE rules, regulatory coherence for SIFs may also be cumbersome to manage.

One of the central features of the public capital SIF—its alignment with national priorities—may also lead to operational complexity for the fund manager as national priorities change during the SIF’s life cycle. As discussed earlier, most public capital SIFs are set up to align with national priorities, a requirement typically reflected in their mandates. Given that the SIF has an institutional longevity that can go beyond election cycles or macroeconomic cycles, national