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Strategic Investment Funds
TABLE 10.6
ISIF Irish Portfolio risk categories
RISK CATEGORY
DESCRIPTION
1
Debt backed by strong cash flows and assets, strong covenants in place; debt with low probability of default and high recovery rate
2
Senior debt with standard covenants, backed by strong cash flows or assets
3
Subordinated debt, stretch senior debt, mezzanine debt, and so on; debt with higher likelihood of default or lower recovery rates; infrastructure equity or equity supported by well-established or regulated cash flows
4
Growth capital to companies with existing revenue; deeply subordinated debt
5
Equity in start-up or distressed companies
Source: ISIF management. Note: ISIF = Ireland Strategic Investment Fund.
(for example, through contractual clauses or seniority in the capital structure) of each investment are considered. Investment limits are based on market value. ISIF’s total exposure, including market value and undrawn commitments, is also monitored as an indicator of the portfolio’s future evolution. Limits are usually revised on an annual basis. The revised investment strategy published on February 1, 2019, is expected to skew the portfolio somewhat toward particular sectors (for example, real estate) and higher-risk-score investments—consistent with the refocus of ISIF’s investment activities on regional development, housing, indigenous businesses, climate change, and sectors adversely affected by Brexit. ISIF can diversify its portfolio abroad, for example, by investing in global funds that are expected to then invest in Ireland. These fund investments can enable ISIF to reduce its domestic exposure while still generating an economic impact in Ireland. For example, a €50 million investment in a €500 million global fund that invests €100 million in Ireland will provide capital to Irish businesses while ISIF is exposed to a pro rata share of the Global Portfolio’s financial outcome. ISIF also performs an all-weather analysis to test the Irish Portfolio’s performance under different GDP growth and inflation scenarios, by examining the latter’s impact on the discounted cash flows of individual investments and subsequently aggregating results at the portfolio level. At the individual investment level, ISIF conducts a detailed analysis and adopts a disciplined approach to the design of capital structures. The risk team produces the risk categorization for each investment. The investment proposal is passed to the NTMA risk function, which analyzes the risks and passes its feedback to the Investment Committee (and, for deals exceeding €150 million, to the board) prior to investment approval. NTMA’s approach to risk management is based on the three lines of defense model and is designed to support the delivery of its mandates by proactively managing the risks that arise in the course of NTMA’s pursuit of its strategic objectives. As the first line of defense, the ISIF unit is primarily responsible for managing risks on a day-to-day basis, taking into account NTMA’s risk tolerance and appetite, and in line with its policies, procedures, controls, and limits. The second line of defense, which includes the NTMA risk, compliance, and other control functions, is independent of the ISIF unit’s management and operations; its role is to challenge decisions that affect ISIF’s exposure to risk and to provide comprehensive and understandable information on risks. The third line of defense, the internal audit function, provides independent, reasonable, and riskbased assurance to key stakeholders on the robustness of NTMA’s governance
