IRELAND – The National Pensions Reserve Fund (NPRF) will invest up to half a billion euro in small businesses in Ireland, the fund’s chairman has announced.

As part of its shift towards a more domestic investment strategy, the NPRF will act as a cornerstone investor on three funds, offering small and medium-sized enterprises (SMEs) access to as much as €850m of equity and credit lines.

The announcement came as the NPRF said it earned a 7.3% return on its discretionary portfolio – the segment not diverted to support the Bank of Ireland (BoI) and Allied Irish Banks (AIB) – over the course of 2012, bringing the NPRF Commission’s total investible assets to €6.1bn.

Discussing plans to commit up to €500m to the SME funds, NPRF chairman Paul Carty said it marked a “significant step” towards a future of investing domestically, while achieving commercial returns.

“SMEs are the backbone of the domestic economy, and the development of these new financing options will enhance their ability to contribute to economic recovery,” he said.

At €450m, the SME Credit Fund, overseen by BlueBay Asset Management, will attract the largest commitment from the NPRF.

The sovereign investor said it had earmarked €175m-325m for investment in the fund, depending on third-party investment.

It will lend to larger SMEs and mid-size corporates, as well as buy and refinance mature loans in instances where banks prove unwilling to extend a new credit line.

While it would not disclose the interest it intended to charge on loans of between €5m and €50m, a statement by the NPRF said the rates would be “competitive” and in line with those offered in the open market.

BlueBay has so far only signed a letter of intent and hopes to have the fund operational by the second quarter.

Additionally, Carlyle Cardinal Ireland will manage a SME Equity Fund of up to €350m in size, investing in companies with overleveraged balance sheets.

The already operational fund received €125m in seed capital from the NPRF.

The smallest vehicle, the €100m SME Turnaround Fund managed by Better Capital, has attracted matching investment from the NPRF and is listed on the London Stock Exchange.

It will invest in companies close to insolvency and commit to restructuring the SME.

The NPRF said: “Typically, 40% of the capital invested by the fund will be used to buy the business, and 60% will be used to finance the turnaround in order to place it on a sustainable long-term footing.”

Plans to launch SME funds were announced a year ago, and minister for finance Michael Noonan re-confirmed the government’s commitment to launch the funds during December’s Budget.

Following significant initial losses on its investment in BoI and AIB, in which it owns a 99.8% stake, the NPRF’s directed portfolio returned 10.4% last year.

While far from its peak of €24bn in late 2010, the fund has gradually seen its value increase again over the past 12 months.

Assets under management totalled €14.7bn at the end of December, up from €13.4bn at the end of 2011.