Introduction

6

Investment Process

INTRODUCTION

This chapter discusses the investment process of a strategic investment fund (SIF). Whereas chapter 5 details the process of establishing a SIF’s investment policy and strategy, this chapter discusses the practical implementation of the investment framework of a SIF. Because SIFs are primarily equity investors, the investment process discussed in this chapter relates to unlisted equity investments.

A SIF’s investment process is a subset of its governance framework, establishing guidelines and procedures to effectively implement the investment strategy and to ensure that the double bottom line mandate is met. The provisions of the investment process cover the whole life span of an investment in unlisted securities, which can be categorized in the following five phases: origination, evaluation, execution, ownership and supervision, and exit (see figure 6.1 for a schematic description). Each component of the investment process is discussed in a dedicated section below.

A diligent characterization of the SIF’s investment process serves several purposes. The investment process guides the activities of the internal or external fund manager appointed to manage the SIF. A well-defined investment process allows the public sponsor to better supervise the SIF and improves public accountability. As stated in the generally accepted principles and practices (GAPP) set out in the Santiago Principles, “there should be clear and publicly disclosed policies, rules, procedures, or arrangements in relation to the SWF’s general approach to funding, withdrawal, and spending operations” (IWG 2008, GAPP 4; emphasis added). A clear-cut investment process will ensure that the same analytical rigor is applied in evaluating and executing investments across a broad and evolving opportunity set as the SIF’s policy mandates evolve. Outlining the investment process up front ensures that the investment team is required to apply rigor in evaluating, executing, and managing investments that may have lower financial returns but are justified by high economic returns. By establishing a clear investment process, a SIF reduces the risk that any misalignment of