The Irish economy is recovering. While not yet back to its pre-crisis levels, recent months have seen an upturn in lending by banks, which presents a challenge for the Ireland Strategic Investment Fund (ISIF).
The €7.1bn sovereign development fund – formed from the remnants of the €21bn National Pensions Reserve Fund (NPRF) not liquidated by the government to rescue domestic banks – was formally launched last December and has been given the dual objective of achieving commercial returns and stimulating growth. Under the mandate, it will re-deploy the NPRF’s assets, largely invested outside Ireland, into domestic projects. In an economy suffering from a gap between demand and supply of bank credit, such a goal would have easily been achieved by offering debt to companies.
“What we are finding is that that gap isn’t there,” says Donal Murphy, the fund’s head of infrastructure and credit finance. “There are plenty of scenarios where there is a very competitive bank market with a large number of banks seeking roles on individual transactions and individual deals.”
Recent deals, which he says has seen around a dozen lenders compete for term sheets, is good news for the economy, but means ISIF has to re-evaluate its approach. “We’d either look at that transaction for a potential junior debt or equity role, if there’s an absence of that, or we’ll move on and look at a different transaction or sector.”
The flexibility of ISIF’s mandate, with no formal investment allocation, means that it has the ability to be both an equity house or debt provider, depending on circumstances. As of September 2014, €1.4bn was invested across alternatives including property, infrastructure and private equity, with the remaining €5.6bn in fixed income and equities to be sold when required.
ISIF key facts
• The ISIF has been launched.
• €7.1bn in assets is gradually being deployed from the NPRF.
• The fund has a dual mandate for returns and to promote growth.
“Having that flexibility can allow us to look up and down that structure and it may be that we play a different role on that transaction than maybe we would have initially envisaged, but it’s still a very useful role and even more importantly an enabling role in transactions taking place that might have otherwise struggled.”
The ISIF is still waiting for its investment committee to be formed, but appointments are expected by the end of the first quarter now that the reformed National Treasury Management Agency’s board – chaired by International Airlines Group’s Willie Walsh – is in place. It will fall to the committee to give final approval to the fund’s investment approach, but Murphy says that, for now, his team will act in line with the current economic impact framework.
Under plans already drawn up, the ISIF will distinguish between low and high economic impact investments, while economic impact is usually achieved as soon as a project has a construction element and leads to boots on the ground.
Low economic impact scenarios could include private housing construction, and Murphy says the fund would not shy away from such investments given that some Dublin house prices halved in the wake of the crisis. But the fund would likely only play a role in the short-term. “Once the market gets back up and re-mobilised, potentially in two or three years time, there may not be a role for us and we’d be looking to recycle the assets and re-invest them in something of more long-term economic impact.”
Social housing should be viewed separately, he adds, as the fundamentals of the project would be different from private housing construction. Other questions that would need answering if ISIF were to get involved in such projects would be whether it would act as project finance provider, with units sold to a local authority upon completion, or whether it would retain ownership. If the latter were the case, then structural reforms to Ireland’s social housing market would be needed.
High economic impact investments would be viewed as areas that are led by export and manufacturing growth, according to Murphy, as well as “enabling” the construction of infrastructure – with the European Commission’s mandated development pipeline under the €315bn Junckers investment plan likely to enable future projects.
On the matter of economic impact, there is the issue of Dublin’s predominance in projects – the greater city region accounts for nearly 40% of Ireland’s population and 47% of GDP. A compromise has been reached, meaning no regional targets will be imposed on ISIF, but it will be required to report each year how its capital has been deployed across the country.
Nevertheless, Murphy rejects the suggestion that the funds are not going towards helping the country as a while. “Clearly, Irish Water literally is going to be reaching every corner of the
country.” The €250m bridging loan provided to the new utility will cover its start-up costs, and allow it to install water meters across Ireland. While charging for water has proved politically controversial, the NPRF was able to negotiate the loan on a commercial basis in 2013, rather than being ordered by government to provide the money.
Other investments benefiting regions outside Dublin are minority stakes in public-private partnerships (PPPs) worth a total of €32m that have allowed for the construction of schools serving over 5,000 students, and a new motorway. Both PPP bundles, worth a combined €380m, were backed by Dutch pension manager PGGM in a joint venture with Royal BAM.
As the two PPP projects demonstrate, ticket sizes for investments can vary, and Murphy admits that, in light of needing to deploy €7bn, some of the projects being examined are small. He says that small projects are considered where they can be scaled up, or act as an example of a financing approach for the rest of the market. Alternatively, as the ISIF has opted to do through its intervention in the small and medium-sized enterprise (SME) market, it can act as a cornerstone investor in funds, leaving a third party to handle the due diligence on transactions otherwise too small for consideration.
“Maximum ticket size is something that we will need to discuss with the board, as part of our investment strategy,” he says, but admits, due to the Irish market’s size, there is likely to be an automatic CAP, with the emphasis more on the risks associated with taking on large projects. “From a risk perspective, we wouldn’t want to be having all of our eggs in one basket.”
However, Murphy says the most important consideration for ISIF will remain the commercial return – balanced against its dual mandate for growth. “We are very conscious that we don’t become the party that ends up picking up projects that no one else is prepared to look at.”