December 31, 2018

A key element of ISIF’s investment strategy is to attract co-investment from third-party investors. Co-investment is viewed as particularly important because it leverages ISIF’s finite resources to significantly increase the quantum of economic impact in Ireland that can be achieved in the investment program.

ISIF targets investments that fall under three strategic drivers:

1. Enabling Ireland. Enabling sectors are those that create the foundations for sound economic growth and fix bottlenecks; examples include housing, of which Ireland has experienced a severe shortage; water; energy; and other infrastructure. 2. Growing Ireland. growing sectors are those presenting significant expansion opportunities for the Irish economy, such as food, agriculture, and export. 3. Leading Edge Ireland. These drivers include new technologies and sectors, such as information technology and life sciences, in which Ireland has established a strong representation or reputation.

Infrastructure, under the broad definition adopted in this book, represents just over a quarter of ISIF’s capital commitments. ISIF defines infrastructure as being its commitment to the airport and port sectors and infrastructure funds (representing about 10 percent of ISIF’s capital commitments as of December 31, 2018). Adding commitments to the water (about 11 percent of ISIF’s total capital commitments) and energy (about 6 percent of ISIF’s total capital commitments) sectors, broad exposure to infrastructure stood at about 27 percent of ISIF’s capital commitments as of December 31, 2018 (figure 10.2). Real estate, of which housing represents the largest portion, absorbs another 20 percent of committed capital. It includes the financing, development, and ownership of new residential housing stock.

FIGURE 10.2

ISIF’s capital committed to Irish investments by sector, as of December 31, 2018

Other, 5% Food and agriculture, 5% Innovation, 2%

SMEs, 20%

Direct equity, 6%

Energy, 5%

Infrastructure, 10%

Real estate, 20%

Water, 12%

Venture capital, 16%

Source: ISIF 2018b. Note: Figure shows sector shares of ISIF’s committed capital in the Irish Portfolio as of December 31, 2018, which totaled €4.1 billion. ISIF = Ireland Strategic Investment Fund; SMEs = small and medium enterprises.

INVESTMENT STRATEGY

Consistent with its mandate, ISIF pursues commercial, risk-adjusted expected returns, varying according to the layer of the capital structure invested and the risk of the underlying investment.

At the Discretionary Portfolio level, ISIF aims for returns over the long term in excess of a rolling five-year average cost of Irish government debt.11 When the investment strategy was defined in 2015, the Discretionary Portfolio return threshold was 4 percent. With the subsequent improvement in Ireland’s economy, the rolling five-year average cost of Irish sovereign debt decreased to approximately 3.6 percent (December 2018). The required level of commercial return varies by transaction, sector, opportunity, and layer of the capital structure invested.

Within the Discretionary Portfolio, the global Portfolio (as defined in the subsection on portfolio and track record) is designed, at the time of writing, to meet effectively its requirement to ensure that capital is available as investment opportunities in Ireland are executed and drawn down, while making a significant contribution toward ISIF’s investment return objective. The legislative policy mandate for ISIF—to invest on a commercial basis in a manner designed to support economic activity and employment in Ireland—requires it to be transitioned, over a period of years, from a largely global portfolio into an Irish portfolio. Immediately converting the global Portfolio into cash is not a preferred option, because the risk-free return on cash is negligible (at the time of writing). To achieve the capital preservation and return objectives for the global Portfolio, ISIF—through third-party investment managers hired on a competitive basis— implements a dynamic, diversified, highly liquid, cautious investment strategy that includes a mix of asset classes including cash, debt instruments, equities, and alternative investments such as absolute return funds. The latter, by design, are expected to have low correlation to global markets, thereby delivering diversification benefits and lower volatility than equity markets.

ISIF is a long-term fund not subject to liquidity requirements, and it aims to be a permanent or patient capital source. The Minister for Finance may, after consultation with the NTMA, direct payments from ISIF to the Exchequer of up to 4 percent per annum of ISIF’s value. No such payment can be made before 2025. In addition, the Minister for Finance has the right to direct that ISIF be invested in specified circumstances, according to Sections 42 and 42A of the NTMA Act 2014 (as amended). For instance, under Section 42, the Minister for Finance, after consultation with the Central Bank, may direct NTMA to invest ISIF assets in specified securities of a credit institution, or underwrite the issue of any securities of a credit institution, if the minister considers it necessary, in the public interest, in order to remedy a serious disturbance in the economy or prevent potential serious damage to Ireland’s financial system.

In the Irish Portfolio, ISIF generally acts as a minority investor, on equal terms with other private investors, for the purpose of generating a multiplier effect and ensuring compliance with the Market Economy Investor Principle for the purposes of EU state aid rules. By acting as a minority investor, ISIF leverages sector expertise, co-investment, and scale. In 2018, 60 percent of the capital committed went to existing strategic partnerships and investments. If ISIF is a cornerstone investor, it may seek preferential terms compared with those offered to noncornerstone investors. When providing debt to a company, ISIF can be the sole or largest debt provider but seeks to represent less than

50 percent of the overall capital structure (debt plus equity). As a government agency, ISIF must not breach the above-mentioned EU rules preventing unfair financial support for private enterprises. Every ISIF investment is strictly vetted in this regard.

In the Irish Portfolio, ISIF invests both directly and through third-party managers, with a target size for direct investments of more than €10 million. In general, it pursues large-value, low-volume investments through direct investments, whereas it invests higher-volume, smaller-value investments through third-party platforms. As of December 2018 indirect investments represented approximately 72 percent of the capital committed to the Irish Portfolio, and direct investments represented the remaining 28 percent. Third-party funds must comply with ISIF’s statutory requirement of commercial return and economic impact, in order to qualify for an investment. In its direct investments, ISIF can invest across the capital structure and over the long term—from secured debt (rated or unrated) to venture equity.

ISIF can make foreign investments both in its Irish and global Portfolios. In the Irish Portfolio, to the extent that a foreign investment is made on a commercial basis and can have tangible economic impact in Ireland, such an investment would be regarded as consistent with ISIF’s policy mandate. Furthermore, to the extent that it is not reasonably practicable for ISIF assets to be held or invested in accordance with the double bottom line mandate, such assets are to be held or invested on a commercial basis with a view to seeking a rate of return considered appropriate by the NTMA.

ISIF’s investment strategy has regard to relevant policy objectives of the Irish government. The NTMA consults the Minister for Finance and the Minister for Public Expenditure and Reform when determining and reviewing ISIF’s investment strategy and has regard to any views expressed by the ministers.

PORTFOLIO AND TRACK RECORD

ISIF’s Discretionary Portfolio is making a transition from a global, predominantly listed securities portfolio (the global Portfolio) to a portfolio that reflects the double bottom line mandate set out in the NTMA Act 2014. The transition will occur over a multiyear period as Irish investment opportunities, primarily in the areas of private equity and credit, are originated and executed. Cash to be redeployed in Irish Portfolio investments is freed through ongoing cash management of the global Portfolio and liquidations of global Portfolio investments as needed. As of December 31, 2018, capital committed to the Irish Portfolio was €4.1 billion, of which €2.8 billion had been drawn down. The remaining global Portfolio was mostly composed of cash, debt instruments, equities, and alternative investments such as absolute return funds managed by global asset managers.12 Table 10.1 provides a summary of ISIF’s portfolio as of December 31, 2018.

As of that date, ISIF was slightly undershooting its return targets. From inception to the end of December 2018, ISIF generated an annualized return on the Discretionary Portfolio of +1.9 percent, as compared to its long-term target of greater than 3.0 percent. The 2017 return was +4.3 percent, made up of +4.5 percent on the Irish Portfolio and +4.1 percent on the global Portfolio (NTMA 2018a, 19). Performance in 2018 was –1.0 percent, reflecting challenging market conditions in 2018 and the low interest rate environment (ISIF 2018b). The negative performance in 2018 was recovered in full as of June 30, 2019.