Reviving the Celtic tiger
The biggest challenge facing Eugene O’Callaghan over the next four years is how to avoid pricing himself out of a recovering Irish market. The director of the €7.6bn Ireland Strategic Investment Fund (ISIF) aims to deploy the remaining three-quarters of the fund’s assets domestically by 2020, in a way that stimulates growth and employment, is commercially viable, but does not lead to a bidding war that drives up asset prices.
But the risk the new sovereign development fund, formally established in late 2014, could “big up the price of assets against ourselves” is only one of the hurdles O’Callaghan must overcome. He and his team must also achieve returns of 4% at a time when the risk-free rate of return is zero or lower.
In its recently published investment strategy, the fund notes that chasing the 4% target could bring with it a danger of tilting the portfolio too aggressively towards risky assets. O’Callaghan says the wording used was necessary to make everyone aware that 4% was a “pretty challenging” goal, but it does not reflect the fund’s pessimism over meeting the target. “It’s far from unfeasible, and not ridiculous, but we needed to make the point that it is challenging enough and that needs to be borne in mind.”
Outlining the sectors it will seek to boost with the rapid deployment of capital, the investment strategy envisages an eventual split into roughly 10 areas. The fund could seek exposure to water and energy projects; offer further financing to small and medium-sized enterprises (SMEs) or residential property developments and invest in private equity in order to indentify “national champions” as firms seek to grow their presence overseas.
The first part of its potential €1bn investment in the property sector was announced in late July. A €500m joint venture with KKR Capital will see ISIF provide €325m to newly created manager Activate Capital, which in turn will offer project financing to residential property developers. O’Callaghan argues that housing is a “critical enabler” for future economic growth, but that the collapse of the construction industry in the wake of the financial crisis means the country now faces a shortfall of properties.
Another area that the government has identified as needing investment, but that O’Callaghan is less certain ISIF will offer funding, is the social housing sector. The director notes that for social housing investments to be on a commercial basis, there will need to be a guarantee of rental income, which may not be viable for low or no-income tenants.
“Ultimately, there has to be an underpinning of that rental income from central government or from local authorities,” he says. “To the extent that that can be delivered in an environment of fiscal constraint, then we could potentially participate in the projects.”
Energy and, specifically, renewable energy could claim around €800m in assets, with O’Callaghan saying the EU’s 2020 target to cut carbon emissions by 20% over 1990 figures will act as a driver for growth in the field. To date, developments have focused on on-shore wind, but both off-shore wind and tidal energy could be beneficiaries due to Ireland’s ample coastline.
But O’Callaghan stresses that he is not wed to the sample portfolio, or the capital earmarked for each of the 10 areas. A review planned for the end of 2016 will allow ISIF’s manager, the National Treasury Management Agency, to sit down with government and decide where changes are needed. “We quite likely will need to resize the various investment buckets as we more precisely calibrate the opportunity set,” he admits.
A new area the fund is also considering is peer-to-peer lending, which, if it materialises, will form part of its efforts to offer credit to SMEs. A speculative tender in April said the lending facility could offer supply-chain finance and more long-term loans. O’Callaghan says ISIF’s impact on the peer-to-peer lending would be small, but its interest was piqued after the market’s growth in the US and UK.
“It’s a new market channel which could profitably and sensibly be catalysed,” he says. “Our money can probably catalyse and accelerate that, taking hold as an option both for savers and borrowers in Ireland.”
Vitally, all of ISIF’s investments will need to have a proven impact, beyond the financial return. The double bottom line is something that sets it apart from other, more traditional investors and pushes it into areas explored by impact investors.
The portfolio will be split into low-economic impact and high-economic impact holdings, roughly defined as investments that create a short-term boost in employment over the course of a project, or loans that create a long-term viable entity with permanent positions and secondary benefits to the economy and exchequer.
“We don’t have any pre-defined targets as to how many jobs we should get per €10m or €100m of investment because, firstly, there’s no real precedent for us to get sensible metrics, and secondly, we have a very wide variety of investments and it’s too early to say,” explains O’Callaghan.
The first economic impact report, covering €1.4bn in commitments made by the NPRF prior to the official launch of ISIF, estimates that close to 8,400 jobs were created, 57% of which were permanent, and generating total wages of €206m.
While ISIF has no obligation to regionally diversify its holdings, the matter is a sensitive topic in a country where the capital, Dublin, accounts for close to half of economic output. The 76 projects and companies to attract investment to date are based all across the country, although most are still in the capital.
The measurable success will be a bonus for O’Callaghan’s team, who will face scrutiny as they invest to boost the until recently struggling economy. But armed with facts, figures and achievements after only six months, he is in a good position to build.