Shedding Green: Ireland Repurposes its National Pensions Reserve Fund

June 27, 2013 by Loch Adamson

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GUTTED BY SUCCESSIVE bank bailouts, Ireland's National Pensions Reserve Fund (NPRF) is about to be stripped of its last remaining assets. On June 13 the Department of Finance announced plans to repurpose NPRF by transforming it into a domestic development fund, the Ireland Strategic Investment Fund (ISIF), and redirecting its remaining €6.4 billion ($8.4 billion) discretionary portfolio of stocks, bonds and alternative investments to commercial investments at home.

If the Irish Parliament approves the plan, NPRF, which was founded in April 2001 to meet future pension liabilities, will cease to exist. Abrupt as the fund's dissolution may appear, the proposed redeployment of its assets is the final stage of a process that began in March 2009, when the government turned to NPRF to help recapitalize two struggling Dublin-based banks, Allied Irish Banks (AIB) and Bank of Ireland (BofI).

Between 2009 and 2011, NPRF invested a total of €20.7 billion in the banks and committed approximately  €725 million of its discretionary portfolio to domestic infrastructure projects, essentially negating its original mandate. In the wake of Ireland's banking crisis and deep recession, Finance Minister Michael Noonan has stated that the government's priority needs to be "creating jobs and opportunities now."

With the proposed formation of ISIF, Ireland will redirect its fiscal reserves toward boosting the domestic economy, tackling unemployment, supporting state education and driving infrastructure redevelopment. ISIF will take minority stakes in local industries alongside institutional investors, a role initiated by NPRF in September 2011, when the sovereign wealth fund launched a strategic investment initiative to refocus its remaining discretionary assets on capital preservation and domestic development.

"We expect the ISIF to invest domestically as a cornerstone minority investor and try to attract others into the market much in the same way as NPRF used to," says NPRF spokesman Brian O'Neill. "It'll be a big part of what the new fund does."

The legislation put forward by the Department of Finance, which O'Neill expects Parliament to ratify before the end of the year, would also restructure the National Treasury Management Agency (NTMA). The agency has undertaken NPRF's investments since the fund's inception. But the National Pensions Reserve Fund Commission, overseer of the fund's discretionary portfolio, would be dissolved. In its place the NTMA board would set ISIF's investment strategy in line with the government's policy objectives, and an NTMA investment committee would vet investment proposals. Eugene O'Callaghan, director of NPRF (and former head of the investment manager program, overseeing the fund's investments in public markets across all asset classes), hasn't disclosed whether he will have a role with ISIF or what it might be.

Over the past two years, O'Callaghan sought to make the most of NPRF's remaining assets by increasingly turning to local infrastructure and development projects, such as the current effort to upgrade Ireland's outdated water distribution infrastructure. If approved, ISIF will be expected to build on and diversify NPRF's domestic investment portfolio with proceeds from the sale of the fund's discretionary portfolio. Meanwhile, NPRF's directed portfolio, which consists of only its €8.8 billion combined stake in AIB and BofI, will be incorporated into ISIF. The new fund will also inherit the holdings of three subfunds that NPRF created in 2011 to provide €500 million in low-cost capital to infrastructure providers and small and medium-size Irish businesses that were hit hard by the global financial crisis.

Although nearly all of NPRF's marketable assets may be sold eventually, several less liquid and more recent domestic investments will remain on ISIF's books. For example, in November 2011, NPRF committed €250 million to the Irish Infrastructure Fund, set up by Dublin-based asset management firm Irish Life Investment Managers and managed by Sydney-based investment firm AMP Capital Investors. And in June 2012 the fund partnered with Silicon Valley Bank, a subsidiary of Santa Clara, California–based financial services firm SVB Financial Group, to help it identify promising Irish technology and life sciences companies that would benefit from new lines of credit. (SVB agreed to provide $100 million in loan capital over five years.) Simultaneously, NPRF committed to invest in technology-focused funds managed by SVB Capital, another of the group's subsidiaries.

NPRF has made some adventurous investments in an effort to spur domestic innovation. Since November 2010 it has allocated capital to the Irish government's Innovation Fund Ireland, which seeks to attract leading venture capital firms to the country to finance new businesses. As of this June the Innovation Fund had made five commitments, including a $50 million allocation to Waltham, Massachusetts–based venture capital firm Polaris Partners. Polaris, which created U.S. business incubator Dogpatch Labs to provide services to entrepreneurs, subsequently opened its first overseas Dogpatch center in Dublin. Two of the three U.S. Dogpatch locations have since closed, but the Dublin Dogpatch remains open.

Given that ISIF is a domestic development vehicle, its investment agenda may not bear much resemblance to NPRF's original mission as a pension reserve fund. But its political proponents hope that NPRF's discretionary portfolio still has enough firepower to help mitigate the widespread and ongoing social damage wrought by the financial crisis and Ireland's lingering recession. Since February seasonally adjusted Irish unemployment has hovered around 13.7 percent. Although that's lower than 2012's 18-year high of 15.1 percent, it's still considerably higher than the European Union's record-setting average for the same period of 11 percent.

The Irish economy shows little sign of recovering before the end of 2013. Liquidating NPRF's €6.4 billion discretionary portfolio and redeploying its assets at home may not have much effect on unemployment, but domestic growth drivers are few and far between, so ISIF could still provide a much-needed capital infusion.

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