3.4 SIFs formed entirely under commercial law

the accountability and transparency of board members and management. An example of this is the malaysian SWF, Khazanah Nasional Berhad (see table 3.4). Khazanah was incorporated as a public limited company under malaysia’s Companies Act 1965. It is therefore subject to all provisions of malaysian corporate and tax law, with no exception granted to it because of its ownership by the government. Such provisions discipline Khazanah’s governance and disclosure requirements, as well as its hiring policies related to specific ethnic groups. Khazanah is also not tax exempt: it pays the same corporate tax rate applied to all malaysian companies.

India’s NIIF represents an evolution in the legal model for a SIF sponsored by a government in that NIIF is subject to private equity regulation. Although mixed capital funds set up by development finance institutions are typically subject to private equity regulation, India’s NIIF is unusual as a mixed capital SIF sponsored directly by the government of India and subject to private equity regulation because of the need to attract investors at the fund level. As mentioned previously, all three funds of NIIF are Category II funds under the Alternative Investment Funds Regulations 2012 and are subject to the supervision of India’s capital markets authority. This makes NIIF unique compared with other government-sponsored SIFs, which, as mentioned previously, either are created by SIFspecific legislation or may be formed under company law.

Because SIFs are akin to private capital funds, mixed capital SIFs typically draw a clear distinction between the legal identity of the fund and its manager. The separate legal identity of the manager can also reinforce its operational independence from the public sponsor. Private capital funds, like other investment funds, are distinguished from other types of companies by their unique organizational structure that distinguishes between the entity holding the assets

TABLE 3.4 SIFs formed entirely under commercial law

SIF OWNERSHIP SOURCE LAW / REGULATIONS FOR FUND(S) SOURCE LAW / REGULATIONS FOR MANAGER

Asia Climate Partners Mixed capital Exempted Limited Partnership Law (2018 Revision) Hong Kong’s Companies Ordinance (Cap. 622) (2014)

Marguerite II

National Infrastructure Investment Funds (India) Mixed capital Luxembourg’s Law of August 10, 1915, on commercial companies (Company Law)

Mixed capital Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, and Indian Trusts Act, 1882 European Union Alternative Investment Fund Management Directive, licensed under Luxembourg law (Marguerite Investment Management) Company Law, 2013 (NIIF Ltd)

Khazanah Nasional Berhad (Malaysia) Mubadala Investment Company (United Arab Emirates) Public capital United Arab Emirates Federal Law No. 2 of 2015 on Commercial Companies

Public capital Malaysia’s Companies Act 1965 n.a.a

n.a.b

Palestine Investment Fund (West Bank and Gaza) Public capital Companies Law No. 12 of 1964 n.a.c

Source: World Bank. Note: n.a. = not applicable; SIF = strategic investment fund. a. Because Khazanah is an investment company, the regulation for management entity is not relevant. Khazanah’s activities in the financial markets (for example, the sale of listed shares in its portfolio companies and related disclosure requirements) must comply with applicable securities law, but the vehicle itself does not fall under fund regulation. b. No separate management entity. c. No separate management entity.

(the fund) and the entity managing these assets (the manager) (morley 2014). Because mixed capital SIFs seek to pool domestic public sector capital with private sector and foreign capital, they tend to adopt both recognizable private sector management and capital pooling structures. The funds of NIIF, for instance, are managed by NIIF Ltd, a separate management company set up under the Companies Act 2013, to facilitate its independence from political influence (see table 3.4).

In many jurisdictions, funds and fund managers as distinct entities are regulated by complementary but separate regulations. Following the 2008 global financial crisis, regulators around the world began to impose new regulations on alternative investment funds—of which private capital funds are a subset—and their managers because of concern for how these funds might affect systemic risk.21 The focus of this regulatory attention is particularly on the fund manager, rather than the fund, and chiefly on those fund managers managing large assets. For example, in 2011 the Eu adopted Directive 2011/61/Eu on Alternative Investment Fund managers (AIFms), which requires certain disclosures, risk management practices, and measures to prevent conflicts of interest.22 The AIFm Directive focuses on regulating the AIFm managing more than €500 million (unleveraged) or €100 million (leveraged). In the united States, funds and fund managers are regulated by the Investment Company Act of 1940 and the Investment Advisers Act of 1940, respectively.23 Consequently, SIFs seeking to closely align with private capital fund characteristics typically ensure compliance with both fund-level regulations and regulations governing the fund managers. For instance, marguerite II is managed by marguerite Investment management S.A., an independent company licensed as an Eu AIFm under Luxembourg law. Similarly, Asia Climate Partners’ general partner, Asia Climate Partners general Partner Limited, is a Cayman limited company, but its management company is a Hong Kong limited company, regulated by the Securities and Futures Commission of Hong Kong SAR, China.

SIF legal structures and domicile

As discussed previously, the choices of legal structure and domicile are deeply interlinked, and typically embedded within the law that establishes the SIF. On the one hand, the fund’s domicile, as the jurisdiction in which the fund is based for business and tax purposes, is a key decision for the SIF sponsor. Different jurisdictions offer a menu of various legal structures, levels of regulation, investor protections, dispute resolution mechanisms, and tax treatment. In turn, the choice of domicile may significantly affect a fund’s contractual arrangements, performance, risk-taking behavior, reporting, and fund survival (Cumming, Dai, and Johan 2015). The legal structure, on the other hand, may signify a SIF’s operational independence. For example, a fund set up as a separate entity with an independent board may more easily access financing independently through the capital markets. This is, for instance, the case with Khazanah, which has successfully conducted multiple bond issuances. The legal structure plays a crucial role in offering a (standard) governance and management system to support the operation of the SIF. The SIF’s legal structure also determines its tax treatment, influences the level of control investors may exercise, and determines disclosure and transparency requirements. The choice of domicile influences the legal structure selected, and conversely the choice of legal structure may influence the chosen domicile.