Mr. Eugene O'Callaghan:

Chairman, Deputies and Senators, on behalf of myself and my colleagues from the NTMA, I welcome the invitation to meet with the joint committee this afternoon.

While the NTMA has no role in policy matters and will not be in a position to comment in this regard we certainly welcome this opportunity, particularly in light of how the National Pensions Reserve Fund’s investment mandate is being reoriented to focus on investing in Ireland.

The legislative and operating framework of the NPRF changed in 2009 when the Government decided to use a significant portion of the assets of the fund to assist with managing the financial crisis. The fund has invested a total of €20.7 billion in Bank of Ireland and AIB at the direction of the Minister for Finance. The NPRF Commission, that is the trustees of the fund, has continued to manage the remainder of the fund – the discretionary portfolio, now approximately €6.8 billion – in line with its original statutory investment policy.

In September 2011 the Government announced its intention to channel the NPRF’s remaining resources, following appropriate changes to its governing legislation, towards investment in sectors of strategic importance in the Irish economy. In June 2013 the Government announced legislative proposals to establish the Ireland Strategic Investment Fund, ISIF, which will absorb the NPRF and will have a statutory mandate to invest on a commercial basis to support economic activity and employment in Ireland.

That is the key basis for our activity moving forward. The commercial nature of ISIF’s investment mandate is of critical importance and I will return to this later.
The Minister for Finance has said that the legislation to establish the Irish strategic investment fund, ISIF, which will be the NTMA (amendment) Bill, should be published shortly and he hopes that it will be enacted by the middle of the year. This will also involve the dissolution of the National Pensions Reserve Fund Commission, with oversight and management of the ISIF passing to a new overarching NTMA board and its investment committee. The new board of the NTMA will also be responsible for approving the business plan for the ISIF, on which we are working at present. The new ISIF will also hold the NPRF’s directed investments in AIB and Bank of Ireland on behalf of the Minister for Finance.
When established later this year, the ISIF will not be beginning from a standing start. Significant progress has already been made by the NPRF Commission in refocusing the NPRF towards commercial investment in Ireland within the constraints of the NPRF’s current mandate. Some €1.3 billion has already been committed or invested in areas of strategic importance to the Irish economy and the legislation in progress will facilitate the remaining €5 billion plus of the fund’s discretionary resources being invested in Ireland.
Finding and developing investment opportunities will be a key function of the ISIF. To help generate investment opportunities and potential investment partners, the NTMA last month held a market engagement and communication event in Dublin Castle. The event was attended by more than 400 delegates, including representatives of pension fund investors, industry bodies and financial and legal advisers to companies, throughout the economy.
We expect opportunities to be developed for the ISIF from a wide variety of sources, both through our own proactive efforts of the executive team within the NTMA and via third parties coming to us with ideas and proposals. We have an open-door policy and actively encourage people to approach us or our third party managers with any proposals or ideas. By way of information, the presentations from the Dublin Castle event and the related contact details are available on the front page of the NPRF’s website, nprf.ie.
The ISIF is unusual in that it will combine a commercial approach to investment with the requirement to support economic activity and employment in Ireland. There is little precedent globally for sovereign funds investing with such a "double bottom line" so unfortunately there is no well-worn path to follow. Essentially we have twin objectives. As there is no well-worn path to follow, we are finding our own way.
While the domestic focus represents a significant change of direction, the ISIF will share one fundamental feature with its predecessor, NPRF - investments will be undertaken on a commercial basis. It is important to understand what "commercial basis" actually means. In simple terms it means that we have to get our money back plus a bit more. When we disburse money we expect to get it back plus a bit more. That “bit more” is the expected investment return, which will vary according to the risk involved in each investment proposition and this risk-adjusted return should be comparable with other opportunities available to investors. If that definition is met, we can say that it is a commercial investment.
One of the key advantages of the ISIF will be its ability to attract co-investment from domestic and international third parties, such as the China Investment Corporation, CIC, with whom the NPRF has recently co-invested. These investors will only put their money to work alongside ours if they have confidence that investments are made on a commercial basis. Not every investment will have the same expected return, risk profile or timeframe but they must all pass the commerciality test of risk-adjusted return.
This commercial requirement imposes a direct discipline on our consideration of opportunities. However, whenever we make an investment, the fact that we are making a financial return and getting the original investment back means that the accompanying economic impact benefits are, in a sense, free. This would not be the case if we were just spending money from a pot of funds, in which case the State’s resources, once spent, have been depleted. In our case, we expect to get the money we expend back with a bit more.
In seeking economic impact, one of our key criteria will be the “additionality” of the economic impact that results from our investment. That is an important word to bear in mind. It would not be an efficient use of our resources if the resulting impact would have happened anyway – this is referred to as “deadweight", where somebody else would have made the investment if we did not do it. Where the purely domestic-focused sectors are concerned, any economic impact would be lower if we produced gains in one sector at the expense of other players in the domestic economy; this is referred to as “displacement”. For example, investing in a new hairdressing business, which might be a very good investment proposition, would quite likely mean that an existing hairdressing business nearby would suffer if our business did well and there would be limited incremental aggregate economic activity arising as a result of an investment of that nature. Avoiding deadweight and displacement has been a central element of Government policy for quite some time and we will apply those principles in the investment strategy for the ISIF.
In recent months, the NTMA, in consultation with the Department of Finance and a number of other Departments and agencies, has been developing an economic impact framework for the ISIF which will help it identify target areas for investment which have higher potential economic and employment impact, and we would expect these areas of higher potential to make up the lion’s share – approximately 80% – of the new portfolio. Some of the sectors with the lowest levels of deadweight and displacement and, therefore, the highest levels of additionality would be those involved in exports, manufacturing, and internationally-traded services. However, there is also some room, perhaps 15% to 20% of the portfolio, for investments with a lower economic impact on the grounds that they have important short-term benefits associated with assisting and accelerating normalisation of capital markets in Ireland. The capital markets have, obviously, struggled as a result or as a consequence of the financial crisis.
At this stage it is envisaged that the ISIF will include investments in infrastructure, public private partnerships, SMEs, venture capital and private equity. These are broad categories and we can go into more specifics, as necessary, later on. Deployment of the ISIF’s €6.8 billion will take at least three to four years, depending on the opportunities available, and the future shape of the ISIF portfolio will only be clearer over time as these investment opportunities materialise.
It is expected that the ISIF portfolio will involve a combination of investment through funds, such as the SME funds in which we have invested recently, which we will discuss later, and direct investment such as our participation in recent PPP projects. An important element of the ISIF strategy will be, where possible, to act as a cornerstone investor, thereby acting as a catalyst for additional third party investors to participate. This will significantly increase the economic impact that can be achieved with the ISIF’s finite resources.
Due to uncertainty regarding the nature of opportunities that may emerge or will be developed, it is not clear at this stage what will be the nature and shape of the ISIF's ultimate investment portfolio or the quantum of co-investment that can be achieved. There will also be a time lag between the ISIF commitment of capital and when money is drawn down. Therefore, it is not feasible at this stage to estimate in advance what the economic activity and employment impacts might be. In the interim, we are developing our capabilities for collating and analysing data to measure and report on economic impact on an ex-post basis, that is, after the investment has been made. This will require a completely new set of data to be reported on by funds and the underlying companies who are used to reporting financial information to their investors but our mandate will also require them to report economic impact metrics. We expect to be able to publish a preliminary assessment of the economic impact of the investments made to date in Ireland during the second quarter of this year.
Turning specifically to the SME sector, in January 2013 the NPRF Commission announced investment commitments to three new long-term funds that will provide €850 million of equity, credit and restructuring or recovery investment for Irish SMEs and mid-sized corporates.

The NPRF played a significant role in the development of these funds and was a cornerstone investor in each, alongside investment from third party investors. The NPRF has committed €375 million across the following three funds: a €125 million to €300 million equity fund focusing on healthy businesses seeking to grow, including those with over-leveraged balance sheets, which is managed by Carlyle Cardinal Ireland; a €50 million to €100 million turnaround equity fund focusing on under-performing businesses which are at or close to the point of insolvency but have the potential for financial and operational restructuring, which is being managed by Better Capital; and a €200 million to €450 million credit fund focused on originating and acquiring loans to larger SMEs and mid-size companies, which is being managed by BlueBay Asset Management.

In addition to these three funds, in June 2012 the NPRF announced a collaboration with Silicon Valley Bank which will make $100 million of new lending commitments available to fast-growing Irish technology, life science, clean tech, private equity and venture capital businesses. In January 2014, the NPRF announced the establishment of the China Ireland Technology Growth Capital Fund, capitalised at $100 million with equal commitments from the NPRF and China Investment Corporation, which is China's sovereign wealth fund. The fund’s strategy will be to make minority equity investments in fast-growing technology companies and Irish companies that have a substantial presence or strategic interest in China and in Chinese companies that have a substantial presence or strategic interest in establishing a presence in Ireland, most likely as a gateway into the broader European market.

Since these funds were signed, each manager has set up a Dublin office, recruited senior team members, integrated the Irish platform within their wider international business and begun to develop local market awareness of their platforms and investment offerings. These activities have positioned the managers as important new players in the Irish market and as alternative sources of funding to Irish businesses. By its nature, the establishment of a new business activity and capability takes some time but the managers have generated significant deal flow to date. Not every opportunity that is considered results in an investment. Often an opportunity may prove to be unsuitable or it may be that our manager is unable to bring an attractive opportunity to a successful conclusion for various, typically negotiation, reasons. However, across the five different managers, more than 400 investment opportunities have been reviewed. Three of the managers have been in operation for all of 2013, one since mid-2013 and the other since early 2014. There were 400 investment opportunities over that period, and 45 terms sheets, which is a detailed proposal for a transaction, have been issued, resulting in 131 transactions completed to date.

The NTMA is currently exploring additional SME fund opportunities that could complement those already in place, with the objective that the eventual suite of funds would have the capacity to invest across the full spectrum of SME financing needs, including the smaller end of the range where, because of higher operations costs, it may be more difficult to establish the commercial case. Additionally, the NPRF has committed €125 million to the Innovation Fund Ireland programme, a Government initiative in conjunction with Enterprise Ireland to attract leading international venture capital fund managers to Ireland, which has seen some venture capital firms, typically from the US, enter the Irish market.

One of the most salient features of the Irish SME sector is that it relies disproportionately on bank credit as a source of finance. In our view, the solution to excessive corporate debt levels is not necessarily more debt but greater use of other financing means such as equity, where the ISIF can particularly make a difference. Its flexibility to invest up and down the capital structure and over longer time periods means it can provide alternative funding options to complement those provided by traditional banking. Nevertheless, the wider backdrop is a complicated one. Banks and the economy generally, including SMEs, are still in the process of deleveraging, and while this is under way, it will inevitably have a dampening effect on SMEs' appetite for growth financing. The ISIF is not, therefore, on its own sufficient to address the problem but it is an integral part of the overall solution and recovery of the Irish economy. In this regard, the NPRF-ISIF works closely with Enterprise Ireland, the IDA and relevant Government Departments.

That is a summary of where we are now. I would like to make a couple of additional concluding points. First and foremost, I must emphasise that the ISIF philosophy is that of a commercial investor, but with an additional objective of contributing to economic activity. Second, investment is different from spending, and economic impact needs to be considered in that light. Third, the ISIF is only part of the overall solution but an important one, and the NTMA looks forward to building on the progress we have made to date. The ISIF may not formally exist yet but it is very much open for business. We have been developing a transaction pipeline, and along with our external investment partners, we are open to investment proposals and ideas and would encourage committee members, as we have done with the wider business community, to approach us in that regard.

I hope my opening remarks have given the committee a good understanding of our role and our work to date and can serve as the basis for some further discussion today. I appreciate members' time and look forward to their questions.