Investing in Ireland

Significant Economic Impact

Mandate

In December 2014, the assets of the National Pensions Reserve Fund (NPRF) transferred to the Ireland Strategic Investment Fund (ISIF). The ISIF has a unique “double bottom line” mandate to invest on a commercial basis in a manner designed to support economic activity and employment in Ireland. The NPRF Discretionary Portfolio was made available to the ISIF to enable it to make investments that meet this mandate. The Directed Portfolio – primarily public policy investments in AIB and Bank of Ireland – continues to be managed within the ISIF under direction from the Minister for Finance.

The ISIF’s double bottom line mandate makes it one of the few sovereign wealth funds globally with a mandate to contribute to economic activity and employment, in addition to delivering commercial returns. The ISIF is required to seek to generate a return over the long term in excess of the cost of Irish Government debt and has set a medium-term performance objective of +4% per annum.

Investment Strategy

In May 2015, the NTMA Board agreed the ISIF Investment Strategy, following consultation with the Minster for Finance and the Minister for Public Expenditure and Reform.

While the macroeconomic environment in Ireland has improved significantly in recent years and the availability of private capital has increased greatly, there are still material gaps in the market provision of finance to sectors and companies and there remains a wide variety of investment opportunities where ISIF capital, in conjunction with private sector partners, can fill gaps and make a real difference to economic activity.

It is important that the ISIF’s investments support the real investment needs of the economy. It was expected that the initial ISIF investment strategy and portfolio design would change over time and that flexibility and adaptability would be critical elements of its business model. To that end, when the initial ISIF Investment Strategy was finalised in mid-2015, it was agreed that a formal review of the Strategy would take place after eighteen months and that this would include consultation with the Minister for Finance and the Minister for Public Expenditure and Reform. The review, which includes an appraisal of the success of the ISIF’s mandate to end-December 2016, is currently underway.

Investments in Ireland

Including investments made by its predecessor (the NPRF), the ISIF had by end-2016 committed €2.6bn to investments consistent with its investment mandate. Including third party co-investor commitments, a total of €7.5bn had been committed to investment in Ireland.

ISIF Capital Committed to Ireland at end-2016

In 2016, the ISIF committed a total of €522m to 22 new investments (average investment size of €24m) across a diverse range of transaction types and sectors.

ISIF Irish Investments 2016

Figures may not total due to rounding.

Economic Impact

The ISIF seeks to allocate the majority of its capital to priority sectors and investments where the highest economic impacts are likely, while also ensuring that all investments satisfy its commercial return objectives.

Over the longer term, 80% of the ISIF’s capital is targeted at investments where the highest and most sustainable economic impacts are likely. The remaining 20% is targeted at investments which will provide short-term economic gains or act as an accelerator of market activity. At end-2016, 65% of committed capital was in high economic impact transactions, with 35% in lower economic impact transactions.

The economic impact and employment supported by ISIF investment differ from traditional Government expenditure. With investment, public resources are returned at the end of the investment period; whereas with Government expenditure public resources are depleted as a result of the spending. Returned investment capital can then be recycled into additional beneficial projects.

ISIF Economic Impact 2016

Responsible Investment

The ISIF is committed to being a long-term sustainable and responsible investor and in July 2016 published its Sustainability and Responsible Investment Policy, reiterating its commitment to operating to the highest global standards. As a responsible investor, the ISIF understands that Environmental, Social and Governance (ESG) factors present both risks and opportunities to be managed across both the Irish and Global Portfolios. The ISIF is putting in place a range of services to assist in the implementation of its Sustainability and Responsible Investment Policy. These included portfolio analytics and active ownership services for the Global Portfolio together with services to assist in the development of an ESG framework for the Irish Portfolio.

Investment in companies involved in the manufacture of cluster munitions and anti-personnel mines is prohibited under the Cluster Munitions and Anti-Personnel Mines Act 2008. In 2016, an investment decision was taken to divest from companies involved in the manufacture of tobacco on the basis that the risks associated with tobacco manufacturing outweighed any potential commercial return over the long term. This divestment was completed in December 2016. The issue of whether further categories of investment should be excluded from the ISIF, in particular fossil fuel companies or sub sets of such companies, is under review. It should be noted that all Global Portfolio investments are scheduled to be realised as the ISIF increases its investment commitment in Ireland.

Performance and Portfolio

Performance is reported on two levels, (i) the Discretionary Portfolio - the investment of which is the responsibility of the NTMA and (ii) the Directed Portfolio – the public policy investments made at the direction of the Minister for Finance.

Discretionary Portfolio

The Discretionary Portfolio earned a return of 2.9% in 2016 and has generated a return of 2.1% per annum since inception on 22 December 2014. In 2016, the value of the Discretionary Portfolio increased by €225m to €8.1bn.

The return to the Irish Portfolio was 6.4% in 2016 and the return to the Global Portfolio was 2.2%. The Irish Portfolio benefited principally from double digit increases in the valuation of some of its venture capital investments. The Global Portfolio’s significant cash and fixed income investments, in line with market conditions, generated low or marginally negative investment returns, while equities and absolute return mandates generally performed well.

In July 2016 the NTMA completed implementation of a medium-term €6.6bn Global Portfolio Transition Strategy (GPTS), which will position the ISIF as a conservatively managed and liquid portfolio to transition from a largely global portfolio into an Irish portfolio, as investment opportunities in Ireland are executed and drawn down.

The overall objective is to ensure that cash is available as required for Irish investments over an indicative period of four to five years, while making a significant contribution towards the ISIF’s investment return objective.

By design, the GPTS is a relatively low risk multi-asset class and multi-strategy investment approach, investing across equities, fixed income, credit, multi-strategy solutions and absolute return mandates through top quality external global asset managers.

Global Portfolio Managers at End-2016

*Legacy NPRF investments (14 managers).

Figures may not total due to rounding.

The ISIF’s global custodian, BNY Mellon, provides custody and transaction services to the NTMA. BNY Mellon is responsible for transaction settlement and the segregated holding of the ISIF’s directly owned public markets assets.

Discretionary Portfolio Asset Allocation at End-2016

Figures may not total due to rounding.

Directed Portfolio

The figures in this section relate to investments held by the ISIF only and do not include public policy investments in Irish financial institutions made by the Minister for Finance through the Exchequer.

During the financial crisis, a total of €20.7bn was invested by the NPRF in AIB and Bank of Ireland at the direction of the Minister for Finance for public policy reasons. These assets transferred to the ISIF on the establishment of the Fund.

At end-2016, the Directed Portfolio comprised:

At end-2016, the ISIF’s shareholdings in AIB and Bank of Ireland were 99.9% and 13.9% respectively. As the AIB shareholding leaves a free float of only 0.1%, the NTMA engaged an external corporate finance firm to provide an independent fair market valuation as of 31 December 2016 for the purposes of valuing this investment in line with generally accepted accounting principles.

The Directed Portfolio had a valuation of €12.9bn at end-2016. Its return in 2016 was -7.9%. Arising from the €20.7bn invested in AIB and Bank of Ireland, cash returns on investments to date have amounted to €6.4bn while investment valuations at end-2016 were €12.7bn, bringing the total amount (income and value) to €19.0bn.

Directed Portfolio at End-2016

Figures may not total due to rounding.