4.7 Recruiting an external manager for a SIF: PINAI

case study in appendix A). Similarly, ISIF’s typical remuneration package comprises a fixed base salary, discretionary performance-related pay where appropriate, and a career average defined benefit pension.

External fund manager selection By choosing to recruit an external manager as the SIF’s primary manager, the public sponsor largely circumvents the link to public sector pay scales. One of the advantages with SIFs run by external private management companies is that their compensation structure can deviate from public sector scales because they are completely outside the government apparatus. Fee levels for such managers therefore reflect the typical private equity combination of management fees and share of profits. The Philippine Investment Alliance for Infrastructure, a 10-year closed-end fund investing in Philippine infrastructure projects and businesses, is a good example of a SIF managed by an external, well-reputed manager (see box 4.7).

The public sponsor must ensure it undertakes a competitive recruiting process, and ideally involve the selected external manager in the design details of the fund to ensure ownership. The general sequence of events for PCFs involves the GP bringing an investment thesis it finds compelling to prospective investors to solicit capital. In the SIF case, this sequence is reversed: the public sponsor has a compelling economic mandate that it wants a professional manager to execute on commercial terms. The public sponsor therefore often uses a competitive request for proposal (RFP) process to identify a suitable primary manager for the SIF (see box 4.7 on the recruitment of the Philippine Investment Alliance for Infrastructure’s manager). To secure the fund manager’s ownership when the general sequence of events has been reversed, the public sponsor must ideally leave some details of the fund design open for the selected fund manager’s input. In fact, the RFP process may offer

BOX 4.7

Recruiting an external manager for a SIF: PINAI

The Philippine Investment Alliance for Infrastructure (PINAI) is a 10-year closed-end fund, dedicated to equity and quasi-equity investments in Philippine infrastructure projects and businesses. PINAI was launched in July 2012 with 26 billion Philippine pesos (approximately US$625 million)a in committed capital and was fully invested by November 2015.

PINAI is an alliance of domestic and foreign investors, with a private fund manager. The domestic investor is the Government Service Insurance System (GSIS), a state-owned pension fund. The foreign investors are the Asian Development Bank (ADB); Macquarie Infrastructure and Real Assets (MIRA), an Australian asset manager with global expertise in infrastructure investing; and Dutch pension fund Algemene Pensioen Groep (ADB 2012). A subsidiary of MIRA was competitively selected to manage PINAI (ADB 2012).

Founding sponsors ADB and GSIS selected MIRA as the fund manager after a six-month competitive process during which the proposed investment mandate was presented by the sponsors to a group of 10 potential fund managers with established track records. Five of these managers expressed an interest in the mandate and made formal presentations to ADB and GSIS, after which three were shortlisted, and MIRA was eventually chosen (ADB 2012).

a. Based on the July exchange rate of US$1.00 = 41.60 Philippine pesos. The Philippine peso depreciated substantially over the following years. As of the end of October 2018, the exchange rate was US$1.00 = 53.40 Philippine pesos.

a platform for brainstorming on the design of the fund with prospective professional managers. Although Marguerite I was not technically managed by an external manager,44 its hiring process offers some lessons for competitive recruitment and involving the manager in the design of the fund. In 2009, the European Investment Bank and cosponsors initiated the competitive selection of a CEO for Marguerite I. The CEO was also to be the first partner of the fund advisory company, was tasked with assembling the full investment team, and became proactively involved in defining an investment advisory agreement, fee structure, and long-term incentive plan aligned with the fund industry’s best practices.

The external manager selection process can be organized in four phases: (1) identification of prospective managers, (2) screening and shortlisting of applicants, (3) detailed due diligence on shortlisted applicants, and (4) public sponsor’s approval process for the selected manager.

In the first phase, the public sponsor identifies a long list of prospective managers potentially eligible to run the SIF. This phase usually involves an RFP and active search by the sponsor’s representatives and advisers. An RFP may be required in accordance with public procurement rules applicable to the sponsor. Table 4.5 shows the indicative content of an RFP, to be tailored to the sponsor’s specific requirements. The active search may involve browsing through PCF industry publications and databases, participation in PCF industry conferences, and networking by the sponsor’s representatives and advisers.

Using an RFP process to identify a manager for the SIF has risks, but engaging in the process also has the advantage of signaling commitment to transparency by a public sponsor. The RFP process is limited to the players available in the market at that time. Perfectly qualified managers may not be ready because they are deploying another fund. The RFP process could also risk forcing teams to come together inorganically, resulting in suboptimal teams.45 Nevertheless, a competitive RFP is still well suited to identifying an external fund manager, particularly for a proposed government-anchored SIF, because of the risks of actual and perceived political interference if using noncompetitive selection and the unpredictability of a timeline that comes with unsolicited proposals. Nontransparent recruitment of a fund manager is susceptible to corruption and can be costly for the public sponsor and SIF owners in the long term. The government of Angola, for instance, has been engaged in a protracted legal battle to sever the relationship between its SIF, Fundo Soberano de Angola, and the SIF’s one-time primary asset manager, Quantum Global. The SIF claims that Quantum’s engagement as manager was founded on improper arrangements between the former CEO and the head of Quantum (Milhench 2018).

In the second phase of the selection process, the public sponsor compiles a manageable short list of the most suitable applicants. Scorecards, on which applicants are evaluated and graded across a series of parameters, can be used to facilitate and document the shortlisting phase.

The third phase consists of an in-depth due diligence of the shortlisted applicants, based on interviews, visits to the managers’ offices, and review of additional documentation. Some of the shortlisted candidates may be screened out in the early phases of due diligence, allowing the public sponsor to devote more time and effort to a smaller group of the best applicants. Due diligence topics will mirror the selection criteria used in the screening phase and summarized in table 4.5 (tailored to the SIF’s specific features). The four core due