Attention private equity firms: There are some new kids on the block, and they’re looking for dance partners. Over the past 15 years more governments from the emerging markets to the developed world have created so-called strategic investment funds (SIFs) that aim to attract private capital to key industries.
Although there are 26 such funds in existence and 13 more in the planning stage, little research has been done to identify best practices or determine whether they can achieve their goals. In an October research paper the World Bank Group shed some light on these mysterious beasts, concluding that with proper structuring and oversight, such funds can thrive. “To be successful, SIFs need to balance policy and commercial objectives, source investment opportunities well, and secure the right staff,” the authors wrote.
After the global financial crisis of 2008–’09, a burgeoning gap in financing for long-term investments pushed many governments to take matters into their own hands. In fact, 17 new strategic investment funds have launched since 2008.
Take the Ireland Strategic Investment Fund (ISIF), for example. The Irish government established ISIF in late 2014 with €7.6 billion ($8 billion) and a “double-bottom-line” mandate to invest on a commercial basis but also make an economic impact. Targeting 4 percent returns annually to cover the cost of operations, the fund makes private equity and debt investments to stimulate the economy and boost employment in sectors as diverse as agriculture, technology, and housing.
To get more bang for its buck, ISIF seeks to forge partnerships. In 2015, for instance, the fund established a €500 million joint venture called Activate Capital that makes loans to residential property developers in Ireland. The World Bank report estimates that for every euro ISIF invests, an additional 1.4 euros get pumped into the Irish economy.
“The most important part is embedding the double-bottom-line mandate in the team,” says ISIF director Eugene O’Callaghan, explaining that most of the fund’s employees were recruited from private sector roles in investment banking, private equity, and the like. “Double-bottom-line mandates are very unusual, so none of us had any practical experience investing both commercially and to deliver an economic impact.”