Stephen Donnelly (Wicklow, Independent)
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54. To ask the Minister for Finance further to Parliamentary Question No. 258 of 17 September 2014, if the loss to date incurred by the National Asset Management Agency since inception to the first quarter of 2014, is €425 million approximately, and based on there being €15.3 billion of assets under management at NAMA, that achieving a break-even by NAMA by 2020 requires NAMA to generate a net annual return on its assets under management of 0.5%; and if he will make a statement on the matter. [40517/14]

Stephen Donnelly (Wicklow, Independent)
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55. To ask the Minister for Finance if he will provide the return on assets under management at the National Asset Management Agency, NAMA, for 2012 and 2013; his views on the contrast between the returns generated by NAMA and those generated by other asset management companies operating here; and if he will make a statement on the matter. [40518/14]

Michael Noonan (Limerick City, Fine Gael)
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I propose to take Questions Nos. 54 and 55 together.

NAMA has reported profits (after impairment) in each year since it was established of an average of €225m per annum other than in 2010, its first full year of operation, when it incurred an impairment charge of €1.5 billion.

NAMA has generated cumulative operating profits (before impairment) of €3.8 billion from inception to the end of Q1 2014. When account is taken of cumulative impairment charges of €4.1 billion over the same period, and dividends the cumulative loss has been €342m. These impairment charges largely reflected the impact of the decline of 25%-30% in Irish property prices in the period after NAMA acquired its loan assets from the participating institutions; loans had been valued by reference to property valuations extant on 30 November 2009.

When international private equity companies make investment decisions, they typically aim for an Internal Rate of Return ('IRR') target in the range of 12%-15% on their equity. Amongst other considerations, there are two fundamental criteria that must exist in order for an IRR or other rate of return measure to be appropriate for an entity that has acquired and holds investment assets:

1. The entity must have control and discretion, without imposed restrictions, over the timing, pricing and composition of what it acquires.

2. The entity must have control and discretion, without imposed restrictions, over the timing and pricing of its asset disposals.

Not only did NAMA have no control or discretion over the assets which it acquired or the timing of the acquisition, it was also faced with many imposed restrictions, including the acquisition price of the assets whereby it was required to pay the banks a price based on the long-term economic value of assets. It was required by legislation to acquire a designated portfolio of assets from five participation institutions at a time when the Irish property market was highly distressed. Unlike the position currently prevailing whereby there are numerous investors interested in acquiring Irish assets, there were no such buyers in 2009 and 2010 when NAMA was being established.

The valuation methodology which was approved by the European Commission required NAMA to acquire assets at 'long term economic value' which incorporated a State Aid uplift averaging 22% above market values. In addition, NAMA acquired assets by reference to a valuation date of 30 November 2009 which meant that it was required to absorb any losses which arose from the 25% - 30% decline in Irish property prices which occurred over the four-year period after the November 2009 acquisition valuation date.

Nor does NAMA now have full control over the timing of its asset disposals. While NAMA is required to obtain the best financial return on its assets, it is also required to carry out its work expeditiously so as to redeem as soon as is commercially feasible the €30.2 billion in senior debt which it issued to acquire loans. This senior debt will remain a contingent liability on the State until it is eliminated . NAMA is not, therefore, in a position where it can hold assets for a long-term horizon as would be the case, for instance, with a pension fund.

For the reasons outlined above, it is entirely invalid to suggest that NAMA should be judged by the same IRR criteria as private equity investment funds which are free to operate without the asset acquisition, pricing or asset disposal restrictions applicable to NAMA.

Unlike NAMA, these funds are free to acquire assets across a broad range of asset classes and jurisdictions and to dispose of them freely. In order to generate double-digit investment returns, it is necessary for private equity investors to have a much higher appetite for risk than would be appropriate for NAMA and any other State entity which is responsible for the management of public funds. NAMA, by contrast, has been tasked with de-risking the State's exposure to property-related assets.

It is also the case that such funds are not required to take into account the various public, social and economic objectives which are addressed by NAMA.

NAMA is obliged under Section 10(2) of the NAMA Act to obtain the best achievable financial return by reference to

(a) the cost to the Exchequer of acquiring bank assets and dealing with acquired bank assets,

(b) NAMA's cost of capital and other costs, and

(c) any other factor which NAMA considers relevant to the achievement of its purposes.

Notwithstanding the various considerations outlined above, NAMA is satisfied that it is well placed to redeem its senior and subordinated debt and, if possible, to generate a surplus for the Exchequer by the time it completes its work. The suggestion in the question that NAMA operates to a target annual rate of return of 0.5% is untrue. NAMA's objective is not only to maximise the commercial return from its activities both annually and over its lifetime but also to maximise the wider public and social benefits that its activities generate.

NAMA has designed and implemented a highly robust Management Information System and has clearly defined key performance indicators (KPIs) in place, which form the basis of its internal reporting and monitoring framework. NAMA is currently reviewing how it can best utilise a rate of return performance measure in this context and will have this review completed by the end of the year.

Stephen Donnelly (Wicklow, Independent)
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56. To ask the Minister for Finance the estimated benefit to the State if the National Asset Management Agency were to achieve a 5%, 10% or 15% net annual return on assets under management for the remainder of its existence. [40519/14]

Michael Noonan (Limerick City, Fine Gael)
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The Deputy's question assumes that NAMA is in a position to retain assets over a medium-term horizon with a view to maximising the return which it can generate from them. This assumption is not in line with the requirement in the NAMA Act that NAMA deals expeditiously with the assets acquired by it and it is not in line with the strategy which has been set out by the NAMA Board and endorsed by me at the conclusion of the Section 227 review which was completed this year.

In interpreting its statutory mandate, the NAMA Board, with my endorsement, has taken the view that the best financial outcome for the State would be achieved through a managed process of disposals in an orderly way with the target of redeeming 80% of senior debt (a cumulative €24 billion) by end-2016 and a growing expectation of being in a position to redeem all senior debt by the end of 2018.  NAMA's senior debt is a contingent liability of Irish taxpayers and reducing and ultimately eliminating it has to be a major priority at a time when Ireland's sovereign indebtedness is still at very high levels. Indeed, this leveraged condition fundamentally contrasts that of an investment market awash with liquidity, which goes some way towards explaining the diverging motives of sellers and acquirers. NAMA deliberately withheld from significantly divesting of its Irish positions until the end of 2013 until this market liquidity appeared, thereby providing an opportunity for the State to de-risk itself of property exposures at strong pricing levels.  To draw comparisons with those purchasing the assets would be to infer that NAMA should prolong the State's exposure to the property market, adopt a speculative risk profile, ignore the requirement to reduce the State's debt burden and add uncertainty to the market's perception of Ireland's recovery process. For that reason, given that it is engaged in a process of deleveraging, I do not expect NAMA to measure its performance by reference to investment entities which have full commercial autonomy in terms of seeking and generating returns.

When international private equity companies make investment decisions, they typically aim for an Internal Rate of Return ('IRR') target in the high single digits given the low returns generally prevailing in the bond markets. Amongst other considerations, there are two fundamental criteria that must exist in order for an IRR or other rate of return measure to be appropriate for an entity that has acquired and holds investment assets:

1. The entity must have control and discretion, without imposed restrictions, over the timing, pricing and composition of what it acquires.

2. The entity must have control and discretion, without imposed restrictions, over the timing and pricing of its asset disposals.

Not only did NAMA have no control or discretion over the assets which it acquired or the timing of the acquisition, it was also faced with many imposed restrictions, including the acquisition price of the assets whereby it was required to pay the banks a price based on the long-term economic value of assets. It was required by legislation to acquire a designated portfolio of assets from five participation institutions at a time when the Irish property market was highly distressed. Unlike the position currently prevailing whereby there are numerous investors interested in acquiring Irish assets, there were no such buyers in 2009 and 2010 when NAMA was being established.

The valuation methodology which was approved by the European Commission required NAMA to acquire assets at 'long term economic value' which incorporated a State Aid uplift averaging 22% above market values. In addition, NAMA acquired assets by reference to a valuation date of 30 November 2009 which meant that it was required to absorb any losses which arose from the 25% - 30% decline in Irish property prices which occurred over the four-year period after the November 2009 acquisition valuation date.

Nor does NAMA now have full control over the timing of its asset disposals. While NAMA is required to obtain the best financial return on its assets, it is also required to carry out its work expeditiously so as to redeem as soon as is commercially feasible the €30.2 billion in senior debt which it issued to acquire loans. NAMA is not, therefore, in a position where it can hold assets for a long-term horizon as would be the case, for instance, with a pension fund.

For the reasons outlined above, it is entirely invalid to suggest that NAMA should be judged by the same IRR criteria as private equity investment funds which are free to operate without the asset acquisition, pricing or asset disposal restrictions applicable to NAMA. Unlike NAMA, these funds are free to set their own risk profiles and acquire assets across a range of asset classes and jurisdictions and to dispose of them freely. It is also the case that such funds are not required to take into account the various public, social and economic objectives which are addressed by NAMA.

If, as part of a hypothetical exercise, NAMA were to assume that (a) instead of deleveraging, it had scope to hold its end-2014 loan portfolio and (b) it had the same flexibility to manage assets as have investment firms, the estimated annual returns up to end-2017, based on 5%, 10% and 15% simple rates of return would be €2bn, €4bn and €6bn respectively and cumulatively. However, as I have pointed out, these measures are irrelevant in the context of NAMA's deleveraging strategy.