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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