Notes

transaction structures. Core elements of the investment strategy include target sectors and geographies, admissible capital instruments, ability to take majority or minority stakes, size of individual investments, and co-investment strategy. • distinguishing features of the SIF investment strategy include (1) the flexibility to invest through a range of capital instruments, subject to the investment’s ability to attract commercial returns and exhibit additionality; and (2) a focus on co-investment and minority investment strategies to facilitate capital mobilization and avoid crowding out private capital. • The risk management framework for a SIF identifies, measures, manages, and regularly tracks all relevant risks that could potentially inhibit the fund’s success. A robust risk management system is an expected feature for alternative investment funds in the private sector and for SWFs based on accepted governance standards. • The SIF’s risk management framework clarifies risk appetite, identifies and measures risks, and establishes a governance structure for risk management.

The SIF typically captures the specific risks to which it is susceptible through a customized methodology that can systematically monitor, mitigate, and report on investment- and portfolio-level risk. risk mitigation is mainstreamed within the SIF’s management, often characterized through a three lines of defense approach whereby each tier has the responsibility to interrogate investment or operational decisions according to their risk impact on the

SIF.

NOTES

1. Alsweilem and rietveldt (2017) compare this strategy to ulysses contracts, named after the story in the Odyssey in which ulysses has his hands tied to the mast of the ship so that he cannot be lured by the sirens. 2. As the nIF Investment Policy Statement of April 2019 well states, “It establishes a structure of guidelines and policies within which the executive management can exercise their delegatedauthorityandagainstwhichrecommendationstothedirectInvestmentsCommittee (dIC) and Board can be judged.” 3. See the Santiago Principles generally accepted principles and practices (gAPP), gAPP 18.3:

“A description of the investment policy of the SWF should be publicly disclosed” (IWg 2008). 4. The policy must be reconfirmed annually by the board. 5. See the FOnSIS case study (appendix A) and Article 13 of Law 2012-34: Authorizing the

Creation of a Sovereign Fund of Strategic Investments (FOnSIS), passed by the Senegal national Assembly on december 31, 2012. 6. Commercially sensitive information has been redacted for the version published online. 7. See Invest europe (2018), which discusses parallel insights with respect to PCFs. 8. See Invest europe (2018), which discusses parallel insights with respect to PCFs. 9. ISIF has published two investment strategies since its establishment. establishment acts and other documents mentioned in this paragraph can be found in the reference lists of the respective case studies. 10. As noted in the thematic review on meridiam (see appendix B), the presence of highly qualified professionals (ideally with an international background) on a SIF’s investment team facilitates co-investments with international PCFs. 11. In the private equity sector, there is increasing evidence that fund investors value a manager’s ability to demonstrate deep expertise in a focused field, in the belief that sector-specific knowledge will lead to better-informed investment decisions (Preqin 2015).

12. note that 10 percent of nIF funds available for investment in any fiscal year must be invested in social infrastructure projects, even if those projects have less than favorable commercial returns. 13. See the Khazanah nasional Berhad Santiago Principles Self-Assessment 2019 (https:// www.ifswf.org/assessment/khazanah-nasional-berhad-2019). 14. This option was never exercised, however; see the marguerite Fund case study in appendix A. 15. Article 3.4.6 of the nSIA Act 2011 says, “given its long-term investment horizon, the Fund can maintain the dual objective of realizing a commercial return and investing in infrastructure which might otherwise not be financed and developed.” 16. Article 11 of Law 2012-34 says, “Le FOnSIS joue aussi son rôle d’investisseur socialement responsable en faisant des investissements et actions à but non lucratif.” (In english:

“FOnSIS also plays its role of socially responsible investor by making not-for-profit investments and actions.”) 17. The risk that the fund may become a forced seller of assets to meet cash obligations. 18. Per Article 43 of the nTmA Act 2014, the minister has the authority to direct the investment, management, and divestment of such “directed investments.” 19. ISIF’s initial strategy from establishment in december 2014 to the end of 2018 focused on

“developing a broad-based portfolio across industry sectors, regions and asset classes” (see the case study in appendix A). 20. See the marguerite Fund case study in appendix A. For more information on the Principles for responsible Investment, see the website (https://www.unpri.org); for more on marguerite’s eSg compliance, see https://www.marguerite.com/sustainability/. 21. See the nIIF case study in appendix A and the nIIF website )https://www.niifindia.in /investing). 22. Organization by industry can facilitate (1) deal origination in that industry, (2) evaluation of deal opportunities when they arise, and (3) understanding whether and how to add value to those opportunities (gompers, Kaplan, and mukharlyamov 2015). 23. See the full text of the act at http://www.irishstatutebook.ie/eli/2014/act/23/enacted/en /pdf. 24. If they participate in greenfield investments, it is usually on an opportunistic basis, or limiting such investments to a small portion of their portfolio (see della Croce 2011). 25. The latter number may be increased to 10 percent with Advisory Committee approval (see the marguerite Fund case study in appendix A). 26. However, growth equity deals can also involve the acquisition of majority stakes by the new investors. 27. For a number of reasons: (1) the share of businesses that are family owned or controlled is very high in many developing countries, and family owners in developing countries are often reluctant to cash out of their businesses, partly because of lack of sophisticated capital markets in which to invest and diversify their wealth; (2) for political reasons, emerging market governments often opt to sell only minority stakes in state-owned enterprises; and (3) in some countries, regulation prevents foreign investors (who may be co-invested in the

SIF) from acquiring control of local companies (see Schneider and Henrik 2015). 28. As opposed to secondary sales of shares by existing shareholders. 29. Large transactions are frequent in the infrastructure sector or in privatization processes. 30. Co-investors could include existing company shareholders that agree also to purchase company shares in a capital increase. 31. ISIF, for instance, primarily takes minority stakes and invests on terms broadly equal to those granted to other investors, such that the fund generates a multiplier effect but also complies with eu rules preventing unfair financial support to the private sector. 32. For instance, one of nIIF’s core goals when it gave a controlling position to dP World in a port platform established by nIIF was to allow investee companies to benefit from the experience of a well-established port terminal owner and operator. nIIF retained a 35 percent stake (see the nIIF case study in appendix A). 33. meridiam—a global infrastructure fund manager that co-invested with FOnSIS, with gabon’s SIF (Fonds gabonais d’Investissements Strategiques), and with ghana’s SIF (ghana Infrastructure Investment Fund)—noted that partnering with a SIF can highlight the long-term commitment to the country of a private fund and solidify the latter’s standing as a serious counterpart (for instance, in the negotiation of regulatory agreements). The

SIF can facilitate the dialogue with government decision-makers and help projects

navigate political change, an important factor affecting long-term infrastructure investments. meridiam noted how such benefits of partnering with a SIF play out regardless of the size of a SIF’s investment in an infrastructure project. See the meridiam thematic review in appendix B for further considerations on the cooperation between SIFs and infrastructure funds. 34. This is also true for investments made by private equity funds (as noted by Schneider and

Henrik 2015). 35. See the nTmA 2015 Annual report (https://www.ntma.ie/annualreport2015/ireland _strategic_investment_fund.html). 36. gAPP 18.2 states, “The investment policy should address the extent to which internal and/or external investment managers are used, the range of their activities and authority, and the process by which they are selected and their performance monitored” (IWg 2008, 8). 37. Some SWFs co-invest with private equity funds in order to reduce fees and to gain experience in initiating deals, in addition to obtaining greater operational control over portfolio companies (see Wright and Amess 2017). 38. ISIF, for instance, pursues large-value, low-volume transactions through direct investments, and higher-volume, smaller-value transactions primarily through third-party funds; as of december 2018, indirect investments represented approximately 72 percent of the capital committed to ISIF’s Irish portfolio. As discussed earlier, in order to expand its reach to a broader set of infrastructure sectors and opportunities in India, nIIF launched a Fund of Funds exclusively dedicated to indirect investing. 39. From the nTmA Annual report (https://www.ntma.ie/annualreport2015/ireland _strategic_investment_fund.html). 40. Section 3.7 of nSIA (2019) says that nISA-nIF “may take on the role of project sponsor and developer as well as investor”; and Section 4.6.5 says that it may “improve capacity and project structuring skills and experience among local sponsors and other key participants.” 41. A nIIF team, the Strategy and Policy group, comprising public-private partnership and investment experts, works with these authorities when it sees the opportunity to set up a public-private partnership project instead of building infrastructure through public finance means (see the case study in appendix A). 42. See the ISIF Santiago Principles Self-Assessment 2019 (https://www.ifswf.org/assessment /ireland-strategic-investment-fund). 43. In describing the risk-related guidelines for alternative investment funds (AIFs), the eu’s directive 2011/61/eu on Alternative Investment Fund managers (AIFms) refers to the risk management framework as follows: “AIFms shall implement adequate risk management systems in order to identify, measure, manage and monitor appropriately all risks relevant to each AIF investment strategy and to which each AIF is or may be exposed.” 44. Al-Hassan et al. (2013) discuss this aspect of risk management for SWFs, but it is equally applicable to SIFs. 45. ISIF avoids the standard statistical approach to building portfolios, for example, calculating the correlation between categories or sectors, because it believes that lack of reliable

Irish private markets data makes this approach unsound. 46. SuchasamarketriskFramework,OperationalriskFramework,marketriskmanagement

Policy, and Operational risk management Policy. See the nSIA Santiago Principles

Self-Assessment 2019 (https://www.ifswf.org/assessment/nsia-self-assessment-2019). 47. See the nSIA Santiago Principles Self-Assessment 2019 (https://www.ifswf.org /assessment/nsia-self-assessment-2019). 48. See the Securities exchange Board of India’s page on AIF regulations (https://www.sebi .gov.in/legal/regulations/jun-2018/securities-and-exchange-board-of-india-alternative -investment-funds-regulations-2012-last-amended-on-april-17-2020-_34621.html). 49. See the discussion of SWFs in Al-Hassan et al. (2013), which also applies to SIFs. 50. See the discussion of SWFs in Al-Hassan et al. (2013), which also applies to SIFs. 51. nSIA (2019), for instance, notes that “the returns of a long-term portfolio can be undermined if the Fund becomes a forced seller of risk assets at an inopportune time in order to meet cash obligations, and policy will be designed to avoid this.” 52. Qualitative risks may be measured using scales. 53. “The FIgr [Framework of Integrity, governance and risk management] includes a risk management Policy, Schedule of matters for the Board (“SmB”), Limits of Authority (“LOA”) for the management, a Code of Conduct and the appropriate policies and