Asian Development Bank

The six stages of investment in funds

When the Private Sector Operations Department develops and implements a fund, we usually do so in six stages:

1. We research developmental objectives and needs
2. We identify primary sponsors
3. We structure the fund
4. We mobilize capital
5. We supervise fund operations
6. We sell the investment

First we research and identify the needs of capital markets in developing member countries (DMCs), and the potential sources of capital. Typically, we confer with other departments in ADB, institutional investors, existing funds, banks, private companies and government agencies. The research may reveal deficiencies in capital markets, sectors that are capital constrained, and new opportunities to use capital to support sound economic activities. New ideas for investment funds are explored and evaluated.

At this stage, we determine whether the objectives of the proposed fund are consistent with ADB strategy for the region or country. For example, in 2001, funds must be targeted to the sectors most severely affected by the Asian financial crisis, and to key sectors that must recover if a country is to overcome the crisis.

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Second, we discuss our ideas for new funds with potential private sponsors with a track record of establishing and managing funds. We look for a match between ADB's developmental objectives and the commercial objectives of sponsors. We need to find a primary sponsor before we can move ahead.

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Whenever we structure a fund, we build in sound principles of corporate governance. At this stage, we do the following:

1. identify the fund manager and core group of investors
2. determine the investment objectives and desired size and life of the fund
3. set exposure guidelines
4. negotiate the management fee, incentives, and allowable costs
5. determine the legal structure and domicile of the fund and the management company
6. negotiate documentation consistent with best practice.

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Fund-raising includes securing commitments from the core investors, placing shares with institutional investors, involving other international financial institutions, and (possibly) underwriting. The fund-raising process is facilitated by the long-term relationships ADB has developed with some of the largest institutional investors in the world.

Generally, a specified period of time, for example one year, is allocated for mobilizing funds. When the target fund size is reached, the fund is closed and operations commence. The closed-end approach encourages the fund manager to focus on making investments rather than engaging in further promotional activities.

Sometimes, a second fund-raising period and second closing are planned. This allows for a phased increase in fund size as the concept of the fund and demand for its capital are proven in practice.

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Throughout the fund-raising period and the operating life of the fund, the Private Sector Operations Department provides supervision. We continuously monitor the fund's investment activities, compliance with exposure guidelines and laws and regulations, and ability to control costs.

For larger funds, ADB may appoint a representative to the fund's board, its management company, and the fund's investment committee. This enables closer supervision.

We advise in specialized areas such as environmental impact assessment and compliance. However, responsibility for decisions on investments rests with the fund manager.

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The Private Sector Operations Department sells most of its investments when the funds reach the end of their planned life and are closed. Any remaining capital is then distributed to the investors.

In exceptional cases, operations could be discontinued earlier than planned, for example by liquidating assets and distributing the remaining capital as a dividend. This might be one approach to handling poorly performing funds or funds that mature prematurely.

Listed funds are treated in a similar fashion to any other listed equity in the Private Sector Operations Department's portfolio. The market price is monitored and an exit strategy prepared when the investment is judged to be sufficiently mature.