Since Alison Romano joined the $33 billion San Francisco Employees Retirement System (SFERS) in the middle of last year, she has spent most of her time working with the team to ensure the fund’s celebrated long-term performance continues in the face of today’s shifting market environment.

Romano joined SFERS after a 13-year stint at Florida’s State Board of Administration and tells Top1000funds.com that she began by approaching her new dual role as both CIO and CEO by focusing on SFERS core principles. This meant outlining SFERS objectives, and how the team should design a repeatable process to meet those objectives. Alongside better-defined objectives, she’s enhanced the investment policy statement, liquidity needs and risk guardrails for each asset class, and talked a great deal on portfolio construction.

“With a refined framework in place, we can better evaluate the return/risk profile of strategy types and individual strategies and, in doing so, put capital to work in a way that is aligned with our objectives. We continue to evaluate our geographic tilts and exposures toward growth and innovation,” she says.

SFERS sophisticated and experienced investment team, who oversee an active public market allocation, top-performing private market exposure and exposure to growth themes such as technology, constantly evaluate new opportunities, debating where to trim or change the allocation.

Currently, a key focus is the fund’s exposure to China in the public equity allocation in light of what she calls “elevated risk.” In recent years, SFERS has sought to increase excess returns in public equity by investing with specialised managers with competitive advantages that has included those with expertise in China. Although exposure to China has added value over the benchmark in the last 3-5 years, concerns have grown with respect to China equities given economic conditions and COVID-19 policies.

As for equity opportunities, she’s assessing value and global mandates to complement existing strategies.

In fixed income, the team added multi-sector credit managers in 2022 and is now researching strategies in the higher yielding multi-sector credit space.

“Across every asset class, I want to make sure with each investment or tilt, we evaluate the risk/return profile in today’s environment and consider all the objectives of the strategy, from return, liquidity, diversification, downside protection, and more,” she says.

Private markets expertise

Other areas she is focused include private credit where SFERS is building out the target allocation to 10 per cent from current levels of 6.5 per cent. With a eye on relative value and risk-adjusted returns, she is looking at de-risking where possible through strategies like lower leverage, higher seniority in a capital structure, or lower jurisdictional risk while also keeping a look out for credit opportunities and distressed opportunities that may be attractive.

SFERS has been actively investing in private markets for years and has notable exposure across private equity, real assets, as well as private credit.

“We are long-term investors, and in long duration assets, maintaining discipline in pacing is important.  That said, we may lean-in or out of certain exposures or look for managers with certain expertise based on our market outlook, the risk/return dynamics, and the positioning of the overall portfolio,” she says.

For example, whereas in the recent past multiple expansion was a key driver of private equity returns, today operational improvement is increasingly important.  SFERS is particularly seeking GPs that have the expertise to facilitate operational change in both good and challenging economic environments.

Reflecting further on private equity, she notes that the prolonged period of low rates, easy monetary policy, strong economic growth and secular trends in technology that created tailwinds prior to 2022 have now changed.

Of course long-term opportunity persists, and private equity continues to have an important role in the asset allocation. But at the moment her particular focus is on growth as a theme, expressed in part through SFERS notable exposure to venture capital.

The portfolio also has an overweight to technology and an increased focus on healthcare, she says. “While our themes will drive portfolio weighting over time, we will remain opportunistic in pursuing top-tier managers across strategies and geographies.”

“We continue to evaluate exposure outside of the US, buyouts, and lower middle-market,” she continues.  As for secondaries, whether SFERS is buying or selling assets, it will apply a similar lens as any investment decision – what is the risk/return trade-off, the opportunity costs, the liquidity needs, and impact on the overall fund.”

With respect to real assets, the team hunts for areas supported by population demographic and migratory trends and assets with strong long-term market fundamentals, including areas like industrials and the digital and energy transition.

A review of absolute returns

This year she has also undertaken a thorough review of the $3.5 billion absolute return portfolio, taking into account the role of the asset class in the total plan. Once again, this process took her back to defining SFERS’ key objectives for the allocation.

In this case those goals are preserving capital relative to global equities during equity market downturns while outperforming global fixed income over a full cycle; producing returns that are independent of the performance of the equity and fixed income markets and providing a secondary source of liquidity.

After defining the objectives, the team then categorised different absolute return strategies as core/diversifiers, risk mitigators, return drivers, and high beta.

“We will continue to emphasise core strategies, such as multi-strat, market neutral, or quantitative.  These will be complemented with risk mitigators like systematic macro and opportunistic return drivers.  We are leaning away from strategies driven by equity or credit beta,” she explains.

This coming year SFERS plans to complete a full asset liability study. Part of the process will include considering current capital market assumptions, liquidity needs today and into the future, a multifaceted view of risk and the fund’s current funding status of 96 per cent.

Perhaps most pertinent is liquidity, particularly in the context of the forecast increase in liabilities – projected to grow considerably faster than the 7.2 per cent discount rate – exposure to private markets, and the slowing of fundraising and distributions.

“We continue to focus acutely on liquidity so that we can manage cash flows and retain the flexibility to be nimble when opportunities present themselves.”

SFERS targets a 7.2 per cent actuarial rate of return over a full market cycle (subject to liquidity needs and other risk considerations) and assets are divided between a target 60 per cent exposure to growth assets (public and private equity), 20 per cent to diversifying assets (real assets and absolute return), and 23 per cent to income/capital preservation that comprises fixed income and private credit. SFERS has the option to employ leverage up to 5 per cent.

Building the team

Romano’s role as both CEO and CIO take her responsibilities beyond just investment. She oversees a team of 125 “talented and hardworking individuals” that includes the 25-person investment team. Her focus is on fostering a strong culture so that SFERS can attract and retain talent across all areas of business, from investments to benefits administration and beyond.

“I aim to create an environment in which our mission, goals, and priorities are clear so that everyone knows how their responsibilities and efforts relate directly to the mission.  I strive to reinforce a culture in which individuals and teams acknowledge successes, learn from mistakes, support active problem-solving, and take ownership at every level of the organisation.”

The key to achieving this type of culture is strong communication, particularly when navigating a hybrid work structure. And this often means listening rather than speaking, she explains.

“There are many things I’ve learned over the course of my career that impact how I work, communicate, and lead.  Leaders are often expected to be the first to speak, the first to suggest the answers.  However, good leadership comes from listening, from asking good questions of the experts on the team, and from creating an environment in which good ideas can be heard and debated.”

“This is also an environment in which I, as a leader, can make well-informed decisions about risks and opportunities. Hopefully, when I lean into the Socratic elements of this management approach, I can empower the team to develop their own solutions and buy into the approach. Of course, communication is two-way, and I am responsible for engaging with the team, sharing information, and providing context for decisions. ”

Alison Romano is a speaker at the Fiduciary Investors Symposium on campus at Stanford University from September 19-21.  Click here for the program.

The differentiating characteristics of unlisted and listed real estate diminish over time according to new research by Norges Bank Investment Management, supporting the sovereign wealth funds’ unique combined strategy for real estate that sees both private and listed sit in the same team. Amanda White spoke to Norges’ CIO of real assets and global head of research.

For the past three years Norges Bank Investment Management, which manages the $1.43 trillion Government Pension Fund Global, has managed its listed and unlisted real estate teams under one umbrella. It was part of a re-organisation to bring the teams closer together following the 2019 shift to manage the real estate exposure in one combined strategy.

The combined strategy is underpinned by the belief that listed and private real estate perform more or less the same over the long term, chief investment officer of real assets Mie Caroline Holstad

told Top1000funds.com in an interview. And now the fund’s research department, led by global head Fredrik Willumsen, have research that supports that strategy.

“In the short- to mid-term there could be major differences, but that changes over the long term,” Holstad explains.

“It’s important to note we have a much longer time perspective than what other institutional investors typically have. And being as large as we are without liquidity constraints, we can sit through the cycles so long as we believe in the underlying fundamentals.”

The success of the combined strategy in real estate is underpinned by these characteristics of the fund – long-term and without liquidity constraints – which in turn means it can approach the listed markets in a fundamentally different way than most other investors.

“We are never a forced seller so we can behave differently in the listed world than others can,” Holstad says. “We are using listed the same way as many investors use private investments, which is clearly very different.”

This shows up in the length of holding and the position size of the listed investments.

“In listed real estate we don’t do small positions, we do large positions which goes with our comparative advantages,” Holstad says.

“And we sit through cycles like this because we believe in underlying economics and fundamentals of those companies. It makes our strategy quite different on the listed side, because most investors use it more tactically.”

For a combined strategy to make sense, positions need to be sizable and Norges can hold up to 30 per cent of companies on the listed side.

On the private side the fund underwrites assets for a minimum 10-year horizon, and the same is true for the listed holdings.

“When we invest in companies, we have extremely good fundamental research, more similar to private equity investment in listed entities,” Holstad says.

“We don’t use the listed part as being tactical in the market, we see them more together as one portfolio. In the long term they behave more or less the same and we are agnostic to how we invest. So, we can enter the market in the way we think makes the most sense for the fund and is efficient.”

Across all its investments Norges takes a very considered, research-driven approach and combining the listed and unlisted teams has resulted in better knowledge sharing.

“Private markets are more out there and have different sources of information, for example they speak to tenant’s ad service providers at assets. When you make that information flow from different geographies as well, and couple it all together we have a massive database of information. It’s been a very interesting journey, and I think we are in a much better place now than we were some years ago.”

Some notable examples of how this has played out in the combined approach include investments in Prologis and Alexandria.

“Investing in logistics real estate for over a decade alongside Prologis has given us a lot of insights into the logistics sector. Our push into logistics on the listed side over the past few years is very much based on our shared conviction and the research carried out by the unlisted team,” Holstad says. “We’ve been among the top shareholders in Alexandria for several years and our listed team has developed a good relationship with senior management there which was instrumental when we made our unlisted life science investment two years ago when we bought into 50-60 Binney Street in East Cambridge.”

Information and knowledge sharing between the teams has been additional to the benefits of cost efficiency. Norges can be agnostic to how it achieves real estate exposures, and the plan is this will lead to more opportunities and bundled deals for the combined team in the future.

Research to back the strategy

The recent research released under a NBIM discussion notes, Drivers of listed and unlisted real estate returns, shows the differences between listed and unlisted real estate appear to reduce over the longer term, and the correlation of their returns increases with horizon. It also showed the correlations with the broader equity market are lower at longer horizons for both real estate segments. These correlation patterns suggest that differences between listed and unlisted real estate returns are short-term and largely driven by transitory factors.

When applied to the Norges portfolio the short-term returns year on year look very different between listed and unlisted, according to Fredrik Willumsen. For example, in 2022 the listed portfolio was down 30 per cent and the unlisted was around zero. 2023 looks so far to be the opposite directionally.

“The idea of expanding the horizon makes total sense,” he says. “Listed and unlisted real estate invest in the same thing, bricks and mortar, so it stands to reason in the long term it doesn’t really matter. It speaks to the strategy we have.”

A combined strategy is also an advantage when markets are in turmoil as is the case now.

“Having this combined strategy and the toolbox to both private and listed means we can talk to companies and do more bundled deals,” Holstad says.

“Sometimes we are invested in listed and unlisted with companies and it makes the dialogue even better when it comes to information flow and opportunity set.”

Efficiency in sector allocations

Efficiency can mean a lot of things including cost, and the listed markets are often a more cost-efficient way to investigate certain sectors before committing to larger stakes.

Historically the allocations to private and public have also varied by sector. One example is that residential property was more likely to be accessed via the listed markets, and logistics is a large private allocation.

Traditionally the fund focused on four core sectors: residential, retail, office and logistics alongside a city strategy that saw eight cities as the geographical focus. But with the structural changes taking place in the real estate market the focus going forward has shifted somewhat.

“We used to say that office was the backbone of the portfolio, now we have moved away from that. We still believe in office, but we are seeing the major bifurcation in quality and location that everyone is seeing so we are more selective on office investments,” the CIO says.

In addition, as more niche sectors like self-storage, healthcare, senior housing , data centres, etc. emerged the fund could diversify even more through its listed exposures.

“As an investor with our mandate we look at how we access each sector in the best possible way, it’s more than just cost efficiency it’s also the quality of the companies and the size.”

The fund looked at how to exploit the expanded real estate sectors but also started tilting the combined portfolio to themes such as AI and climate.

“These are big themes, and we are looking at whether we can be at the forefront of these massive trends. It’s the same with logistics and retail, you only need to look at your neighbours and friends and how they do their shopping. It’s about those mega trends and how we can participate in those. We haven’t moved away from looking at the eight cities, but we are broader when it comes to geography, and more flexible when it comes to sectors. The combined strategy gives us flexibility  in a cost-efficient way.”

On the private side efficiency also extends to the choice of partner in the joint venture and their ability to have skin in the game.

“One of the most important things is for our partners to have very good local knowledge and also be a long-term investor, we don’t want people flipping assets. It’s about alignment of values and having a good reputation in the market.”

Holstad says given the specific investing environment combining local knowledge with macroeconomic themes is important.

“ We have been building up exposure in sectors like life sciences, logistics and residential where we have strong conviction about attractive long-term structural outlook and are actively monitoring and adapting to new themes emerging”

 

Boards face a vital role supporting governance around climate change. The board journey of Canadian fund HOOPP serves as a starting point for other boards feeling equally challenged by the complexity of the issue writes Gerry Rocchi.

For pension plans and other institutional investors, the greatest concern around board governance of climate change issues can be put simply: how to ensure you’re having meaningful discussions on such a complex subject.

This is a risk with any subject that is highly complex – that the discussions stay at a superficial level. And climate change has, perhaps more than any other issue, the potential to amplify all complexity, especially in the investment area, where climate change impacts are ubiquitous.

It would take a whole other, and lengthy, article merely to describe the unique aspects of climate change in relation to investments that includes uncertainty and rapidly changing estimates of the level, path, pace, costs, regulations and opportunities related to decarbonization and adaptation; macroeconomic impacts; collective investment and reporting initiatives.

What can a diverse board, with members of varying levels of understanding of climate change, do when faced with governing such a complex issue? Our approach at HOOPP (Healthcare of Ontario Pension Plan) was to underpin critical decision-making and supervision on climate change with effective and efficient process and practical steps. What follows is the story of the HOOPP board’s journey on climate change, at least to date, as this is a rapidly evolving space. It may serve as a starting point for other boards feeling equally challenged by the complexity of the issue.

HOOPP is a pension plan for healthcare workers in Ontario. It finished 2022 with C$103.7 billion in assets and a funded ratio of 117 per cent (meaning for every dollar we owe in pensions, we have $1.17 in assets). A history of strong returns has been accompanied by frequent increases in benefits and stable contribution rates while maintaining strong funding. HOOPP and its board are responsible for all aspects of the pension plan – investment, administration, contribution rates and benefits.

In 2022 and 2023, the HOOPP board analyzed how it should fulfill its fiduciary obligation with respect to climate change. Here’s what we have done:

1. Separated climate change from ESG for board-level governance because climate change poses unique issues that merit unbundling it from other discussions. We seek to retain consistency of approach and cross-pollination between the two areas.

2. Clarified committee mandates to reduce overlap and concentrate expertise. The audit and finance committee is now responsible for oversight of reporting because what gets measured gets done, and we expect that climate change reporting will attract more demands for external assurance.

3. Conducted a competitive search and hired an external advisor (EY) to provide independent advice to the board. This advisor is not meant to repeat work done by management, but will focus on board education, independent advice to the board, and independent board research. Some of the early research by HOOPP’s advisor will be directed to a review of best practices in pension board climate change governance; what we learn may inspire us to evolve our approach even further.

4. Designated a specific day to exclusively discuss climate change between the Q1 and Q2 meeting cycles. While we hold routine and comprehensive discussions on climate change at regular board meetings, this dedicated session ensures that any new or modified board requests are relayed to management promptly, facilitating coordination with other policy updates for Q4 approvals.

5. Commissioned research on the most effective ways to incorporate climate change in incentive compensation, including whether to use climate change results as another weighted additive factor, or as a multiplicative modifier.

6. Prioritized board education on climate change and related governance, including current guidance, regulations and court cases on how a board fulfills its fiduciary obligation with respect to climate change. This is done through a combination of management, the external advisor, external counsel, and external courses. HOOPP already has board members who have taken the Institute of Corporate Directors’ Governance of Climate Change course, and more external education will continue.

As HOOPP’s website states: climate change poses one of the most urgent and pressing systemic challenges of our time, with unique risks and opportunities. And it can no longer be approached solely as a long-term issue.

Against that backdrop, it is imperative that a board executes its governance role with focus and purpose, and ensure it is having meaningful discussions. The key to achieving this is process and practical steps. The steps outlined above have set the HOOPP board on a promising path, yet we understand this is an ongoing journey. We will re-examine our approach as we learn more and as we reap the results of the decisions we have made and the processes we have implemented, having taken the time as a board to build a solid foundational capacity and knowledge base on this critical issue.

Gerry Rocchi is co-chair of the Healthcare of Ontario Pension Plan

The $315 billion CalSTRS is looking to build a top-down portfolio function to better incorporate liquidity management alongside portfolio construction and to consider how it can better deal with often lumpy cashflows to maximise returns, while continuing to keep a tight rein on risk.

CalSTRS is developing a new top-down total portfolio function to better incorporate liquidity management alongside portfolio construction.

Deputy chief investment officer Scott Chan says the fund is at the early stages of enhancing its liquidity oversight and is building the teams and tools to centralise that function.

“Portfolio construction is at the heart of how we look at liquidity oversight, as a tool to enhance how you construct the portfolio. They go hand in hand,” he told Top1000funds.com in an interview.

“But it is integrating these components into the portfolio construction that is the hard part. You need all of your private and public markets working together and that’s hard for organisations to get right.”

Chan says the fund already has significant experience and tools for liquidity management across the various divisions, but the maturation of the portfolio meant evolving and enhancing the liquidity function was important.

The fund has a mature member profile and it pays more in benefits than it receives in contributions. In addition, a two-decades old private markets allocation means cashflows need smoothing.

“We have been increasing our allocations to private markets over the past two decades which has worked out remarkably well,” Chan says.

“But if you start every year with a negative cashflow and layer on more volatile cashflow there is an ongoing need to manage liquidity. For example, in 2021 we had a ton of cashflows come back from private investments but today not so much.”

CalSTRS’ liquidity priorities are paying benefits, avoiding selling assets at a discount, taking advantage of dislocation opportunities, and building a resilient portfolio that can rebalance to asset-allocation targets and take advantage of opportunities in the event of a recession.

“Liquidity is a tool that enhances your portfolio construction and helps build a resilient portfolio,” Chan says.

“Liquidity is the lifeblood. In this environment it’s becoming more and more important.”

A core goal in the liquidity and leverage management is to smooth out cashflows over a business cycle.

“Some years you get a lot of cash back and others you don’t, it’s lumpy cashflow,” Chan says.

“Over a cycle you can smooth that out using leverage and liquidity tools.

“We are not intending to take on permanent amounts of leverage, thinking of it more as a way to enhance the portfolio construction over a business cycle.”

Chan says the intention is that balance sheet/liquidity management will add to the existing investment strategy and risk unit which already looks after asset allocation.

A team will be hired, from both internal and external resources, and sit under a head of total portfolio management.

“It will be really critical to get this right,” Chan says.

“It is important to integrate this tightly and weave it into portfolio construction. It will be a multi-year evolution and phasing. Our organisation needs to mature into the idea of how we enhance the liquidity management.”

Chan says it is not just the technology and resources that need to evolve, but the governance structure as well.

“As we evolve we will continue to build out those risk processes,” he says.

“And we will have to build out further governance too, related to how we make the decisions. It’s going to be a multi-staged evolution for us.”

ALM and asset allocation evolution

The $315 billion fund recently went through an asset/liability exercise and made three significant changes to its asset allocation.

The global equities allocation was reduced by 4 percentage points with 2 per cent of that going to a new private debt allocation. The fund had previously invested in private lending through its innovation bucket and this is the first time that it has had its own allocation.

“Private credit is an incredible opportunity today,” Chan says.

“When you think about the portfolio of the future, here you have something near mid-teens returns and you are high in the capital structure, which is better in a recession. It is a critical part of our asset allocation going forward.”

CalSTRS’ innovation portfolio has been an incubation bucket for many asset classes that now have their own, more permanent allocation like private credit, inflation-sensitive assets and the risk-mitigating strategies bucket, which is where global macro, CTAs and other risk-mitigation hedge funds sit.

That bucket is now going to be expanded to consider other opportunities to add to diversification.

“We’re looking at how we can design greater flexibility to the portfolio,” Chan says.

“For example if there is a recession can we take advantage of the opportunities.

“The innovation portfolio has done well historically. Bonds might have returned 1.7 per cent over the last 10 years and we got a lot more return out of the asset classes [in the innovation bucket] and got diversification. We will continue to expand that opportunities bucket to flow into different areas. It gives us that flexibility that’s important in portfolio construction and asset allocation because the market is a lot more uncertain.”

It also allocated a further 1 per cent to private equity, taking it to 14 per cent, and another 1 per cent to infrastructure.

CalSTRS had a one-year return to June 30 of 6.17 per cent and a three-year return of 10.1 per cent, well above the actuarial rate of return of 7 per cent.

Australia’s sovereign wealth fund has handed mandates to external active managers and built a dedicated treasury management function, six years after going all-in on passive index strategies. It is is also on the hunt for early stage venture opportunities as it continues to forecast challenging conditions and higher persistent inflation.

Australia’s sovereign wealth fund has handed a handful mandates to external active managers and built a dedicated treasury management function, six years after going all-in on passive index strategies. The A$206 billion ($136 billion at June 30) Future Fund has entered into contracts with specialist global equities over the past two years as it seeks an edge in what it expects to be a challenging environment for investors amid higher persistent inflation.

“We have been looking at active management in global equities … where we think there are pockets of opportunity for active managers and we can do that at meaningful scale,” Future Fund CEO Raphael Arndt told Top1000funds.com. “We’re definitely not in ‘set and forget mode’.”

While Ardnt made clear he wasn’t moving entirely out of passive mandates, the comments reflect a major strategic re-direction for the Future Fund, which in 2017 placed the vast bulk of its equities portfolio into low-cost index strategies, concluding it was increasingly difficult to justify the fees asked by active managers, especially in Australian domestic equities (Future Fund revamps equities).

“This is a multi-year strategy and we haven’t lost conviction in that. You don’t move $250 billion worth of capital in six months.”

The sovereign, which must by Australian law publicly disclose the external managers it employs, lists four developed and emerging market managers on its books at March this year (UBS, State Street, Legal & General, Insight and Robeco) and is expected to add more names at its next update.

The sovereign has also commenced a project of more actively managing and monitoring liquidity, centralising and establishing a formal treasury function staffed by three full-time equivalents, and investing in software upgrades.

The revelation came as the fund reported what Arndt described as a “solid” result of 6 per cent in the 12 months to June 30, under-performing its target of 6.9 per cent a year. It has returned 8.8 per cent a year over the 10-year horizon and has grown its initial A$60.5 billion ($43.3 billion at April 3 2006) endowment from the Australian government almost fourfold since, with no additional contributions.

Arndt said the sovereign held to the thesis that inflation would be “sticky and sustained”, revealing a more bearish outlook than some global peers, with consensus beginning to emerge that the worst of the post-pandemic inflationary cycle may have passed.

“Favourable investment conditions that drove markets in recent decades have been undergoing profound changes,” Arndt said.

“Markets have been under-pricing the significant economic and geopolitical risk that we have anticipated. “The … portfolio is positioned moderately below neutral risk settings at a time when the economic outlook and the direction of inflation and interest rates make investment returns less certain.”

Nonetheless, he said the fund would actively pursue opportunities, via its specialist managers, including in risk assets, especially venture capital.

“We continue to invest in early stage venture because if anything its becoming more attractive – capital is drying up and it’s actually getting cheaper and more competitive,” Arndt said. “We have high conviction we are investing with the best managers in the world, so we continue to do that.

“[Another] area we are getting quite excited by is pretty boring, vanilla credit, we’re investing in investment-grade credit [that is] … structured and somewhat liquid.

“And even boring old bonds are [looking] not too bad, relative to the risk you’re taking.”

The sovereign earlier this month announced Ben Samild, its former deputy chief investment officer, as the permanent CIO, a role Arndt had been performing since the departure of Sue Brake in June 2022.

Samild, who previously ran the Future Fund’s debt and alternatives strategy, is a noted advocate of its “joined up” strategy, akin to the total portfolio approach.

“You can’t run the kind of investment program we do without the culture of ‘one portfolio’ in place from the beginning,” he told a conference hosted by Top1000funds.com sister publication Investment Magazine Australia in 2021.

When Sujoy Bose joined India’s National Investment and Infrastructure Fund (NIIF) in October 2016 he was the first employee at the fledgling sovereign development fund (SDF) that still didn’t have money or funding in place. Set up to catalyse domestic investment and growth, NIIF had a clear structure and firm backing from India’s Ministry of Finance, but things were far from settled. Bose’s first priority was to secure initial expense funding to pay salaries for the organization’s first staffers who joined in January 2017.

Today NIIF has around $4.3 billion under management across three funds comprising infrastructure, fund of funds and growth equity (just like the assets found in any resource-rich country’s sovereign wealth fund) and strategy is overseen in an innovative, collaborative model between the government and commercially minded investors hunting returns in India’s fast-growing market.

All three funds have performed well and are among the largest among their peers in India. The growth equity fund recently announced the first successful exit of one of its investments and NIIF plays an important role in providing informal advisory support to the government around asset monetization and creating investor-friendly policies in sectors such as airports and smart meters.  Recently it announced plans for a new India-Japan Fund focused on green investing which will take AUM to almost $5 billion.

But it is NIIF’s role as a poster child for development finance, an area many governments have been trying for decades, without much success, to formulate the right approach about which he is most excited. After nearly seven hectic years, Bose recently announced his decision to leave NIIF.  He hopes his contribution to building a collaborative investment model that mobilizes equity capital at scale to invest in priority areas in a public private format that also delivers investor returns will be replicated in other countries and sectors.

“It is very encouraging that the success of NIIF has spurred similar initiatives in other countries,” he says. “Those countries are taking aspects of what makes NIIF a solid, well-structured entity and are building on that and adapting and improving the structure.  It is possible that the NIIF model can be used in many development areas – infrastructure, climate, healthcare, education and others.”

key pillars in Getting started

Early, important decisions included withstanding pressure to invest until key pillars were in place.  State-owned investment banks had identified a small pipeline of potential investments, but Bose wouldn’t be rushed. The government had approved a $3 billion investment in the fund subject to conditions but the drawdown process and timing wasn’t settled.

Building the ownership model has been another vital element.  NIIF Ltd, the manager of all NIIF funds is 49 per cent owned by the government, 3 per cent by domestic commercial shareholders and 48 per cent by international institutions.  This ensures Indian-ownership and control – but that it is also majority controlled by non-government shareholders. “It’s the perfect combination of sovereign comfort for investors seeking Indian exposure alongside the discipline required to enable the platform to operate as a fully commercial asset manager.”

International institutions include Abu Dhabi Investment Authority, AustralianSuper, Temasek, Canada’s Ontario Teachers’ Pension Plan and Canada Pension Plan Investment Board, who are also anchor LPs in NIIF’s infrastructure fund. They entrust capital in a “blind pool” to NIIF’s management team, which invests the capital based on an agreed investment strategy.  It ensures alignment of interest between investors and NIIF, while clearly defining boundaries and a risk-return balance.

NIIF can operate without interference from investor LPs, as long as it operates within the pre-defined criteria. In NIIF’s case, the funds are trusts and the manager is a limited liability company, he continues.

“This enables some investors to become shareholders of the manager, without taking on partnership-related liabilities, which was crucial as it achieved the objective of minority government shareholding”.

Elsewhere the government’s contribution provides instant scale – something that’s always been a challenge in the Indian and emerging markets asset management industries.  “Scale would bring cost efficiency, something that is key to most institutions globally, and attract high quality talent, thereby creating a virtuous cycle over time as NIIF’s track record builds up.”

Bose uses the final close of NIIF’s $2.3 billion infrastructure fund to illustrate these key structural themes in action. Commitments included highly reputed Indian and international institutions alongside the government’s 49 per cent contribution. Investors comprised two SWFs, four international pension funds, two life insurance companies, a DFI, three Indian private banks and a large Indian AMC. “It was an ideal mix for an infrastructure fund,” he says.

Indeed, he believes that NIIF’s approach to infrastructure investment has been notably different to the strategies of most Indian infrastructure funds. NIIF invests primarily via control or co-control platforms, and is reluctant to invest in passive financial stakes alongside EPC contractors or developers, which Bose says mostly leads to misalignment of interest and has a poor track record.

So far NIIF’s infrastructure fund has already invested in six platforms, across ports and logistics, roads, renewable energy, data centers, and airports. In addition, NIIF has also developed India’s fastest growing infrastructure debt financing company, which currently has a loan book of $4 billion, with not a single non-performing asset.

Governance clarity

Bose says that one of the most critical aspects to get right has been management of expectations. Namely balancing the need to generate a return for investors alongside keeping the government happy by investing in economic development at scale.

“Managing expectations and keeping key people in the loop on every step was key,” he says.  “At the same time, it was always important to ensure that the team did not feel any pressure to pursue objectives beyond an appropriate risk-return balance.  Getting all these aspects right enabled NIIF to operate independently and confidently.”

The board of NIIF Ltd has nine directors, two of which are nominated by the government, four by investors, two independents, and the CEO. Key board committees have either a majority of investor-directors or independents which ensures the collaborative approach to the governance of NIIF, without giving control to any one investor or the government.  NIIF also has a governing council, which is chaired by the finance minister.

“The GC is an influential part of the governance of NIIF, however it does not have decision-making power – it provides strategic guidance to NIIF management,” he says, continuing. “It keeps NIIF management connected to senior levels of the political and bureaucratic leadership of the government.”

Finally, the investment committees overseeing the funds are made up of professionals with incentives aligned to the performance of the funds – there are no representatives of either the government or investors on the IC. “The combination of the construct of NIIF Ltd. board, the GC and the IC make for a balanced, arms-length and strong governance structure of NIIF with the right alignment of incentives.”

However, it’s a governance framework that Bose advises might not suit every aspiring sovereign development fund.

“Would a public-private approach work with all the requisite governance and arms-length requirements? If not, governments should just create a state-owned development bank,” he advises.

As to what he is going to do now, he says he’s sifting through a raft of ideas and offers. “I will take my time to consider opportunities and commit once something with the right credentials presents itself,” he concludes.