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Special Report

Impact investing


Iceland’s crisis fund

Icelandic pension funds are in the process of finalising details of the Icelandic Investment Fund (IIF), which will invest in domestic businesses that have suffered in the economic crisis. Hrafn Magnússon, managing director of the Icelandic Pension Funds Association (IPFA), an umbrella organisation for 33 pension funds, revealed that the IIF is expected to have funds of between ISK 50-75bn (€275-413m) to invest in companies in all economic sectors.

A document from the IPFA outlining the initial investment policy and process of the IIF noted that firms which “bring in foreign currency, or reduce the need for foreign currency, by their business are especially interesting”.

The exact number of pension schemes expected to contribute to the fund - and the size of the contributions - is still being debated, and the IIF aims to be socially responsible, working within international guidelines set out by the OECD and UN Principles of Responsible Investment (UN PRI).

However, Magnússon is hopeful that all the largest pension funds in Iceland will join the fund. The IPFA has contacted all its members, and they have until 15 October to make a decision. The IIF will be established in October, or by November at the latest.

According to the IPFA, the main objective of the IIF is “to attain a good return on the pension funds’ financial contributions”. The primary target for investments are Icelandic businesses that are in financial or operational difficulties because of the collapse of the financial system, but are deemed to have “interesting investment prospects”.

Details of the investment policy will be set by the fund’s advisory board, which will include criteria setting out the minimum size of business that can receive investment. However, it is currently envisaged that the required rate of return for individual investments by the fund is “on average at least 25%”.

It is also suggested that there will be no ‘cap’ on the IIF’s maximum possible investment in a company, although the aim would be a stake of between 35-55%, giving the IIF “sufficient and appropriate influence on the management of the relevant corporation”.

Investments by the IIF are expected to take the form of increases in share capital and the purchase of shares, or perhaps loans with the right to convert to share capital, conventional loans with collateral or the takeover of loans for restructuring purposes.

The IPFA is to play a leading role in establishing the IIF, as Magnússon noted. “We started discussing this matter at the beginning of the year, but for many reasons the preparations have unfortunately taken too long.”

The IIF is not perceived to be a permanent tool, as the “period of operation of the fund is foreseen as being up to 10 years, with the possibility of extension for another two years, after which the IIF will be dissolved”.

The move to use pension fund money to stabilise the economy was put forward in November 2008 by the International Monetary Fund (IMF), which suggested that pension funds should buy more local government bonds.

The IPFA noted, however, that the current situation in Iceland requires new finance to help support businesses which have suffered because of high inflation and interest rates and a falling Icelandic króna (ISK), but which have the potential to survive the current problems.

It pointed out this puts pressure on pension funds “to participate in the resurrection of businesses, which by their activities yield pension fund contributions; and on the other hand offers an opportunity for funds to gain a share in the operational successes of many excellent businesses, which could yield a satisfactory return in the long term, if the right decisions are made”.

Plans to establish the IIF follows confirmation of a poor performance by funds in 2008. The annual pension fund report from the Financial Supervisory Authority (FME) showed a real rate of return of -21.78%, following the collapse of the banking system in October 2008.

The FME highlighted that the depreciation of the ISK by 80.24% and a hike in inflation to 16.36% also impacted pension fund investments, resulting in the value of net assets dropping 6% to ISK 1.6trn (€8.8bn) from ISK 1.7trn at the end of 2007.

Although the depreciation in the currency helped increase the value of the pension funds foreign investments, the report revealed that the financial instability caused pension funds to move away from equities to less risky assets.

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