Joint Committee on Jobs, Enterprise and Innovation debate -
Tuesday, 8 Apr 2014

Investment Commitments to SME Sector: National Treasury Management Agency

Chairman

In our discussion on investment commitments to the SME sector, Mr. Eugene O'Callaghan, director of the National Pensions Reserve Fund, NPRF, will discuss how SMEs can access other money as opposed to the usual banking finance. This is part of the ongoing discussion on SME financing. I welcome Mr. Eugene O'Callaghan, investment director, Mr. Nick Ashmore, deputy investment director and Ms Emma Jane Joyce, senior investment manager from the National Pensions Reserve Fund to discuss investment commitments to the SME sector in Ireland.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. If they directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or an entity either by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

I ask Mr. O'Callaghan to make his presentation to the committee.

Mr. Eugene O'Callaghan

Chairman, Deputies and Senators, on behalf of myself and my colleagues from the NTMA, I welcome the invitation to meet with the joint committee this afternoon.

While the NTMA has no role in policy matters and will not be in a position to comment in this regard we certainly welcome this opportunity, particularly in light of how the National Pensions Reserve Fund’s investment mandate is being reoriented to focus on investing in Ireland.

The legislative and operating framework of the NPRF changed in 2009 when the Government decided to use a significant portion of the assets of the fund to assist with managing the financial crisis. The fund has invested a total of €20.7 billion in Bank of Ireland and AIB at the direction of the Minister for Finance. The NPRF Commission, that is the trustees of the fund, has continued to manage the remainder of the fund – the discretionary portfolio, now approximately €6.8 billion – in line with its original statutory investment policy.

In September 2011 the Government announced its intention to channel the NPRF’s remaining resources, following appropriate changes to its governing legislation, towards investment in sectors of strategic importance in the Irish economy. In June 2013 the Government announced legislative proposals to establish the Ireland Strategic Investment Fund, ISIF, which will absorb the NPRF and will have a statutory mandate to invest on a commercial basis to support economic activity and employment in Ireland.

That is the key basis for our activity moving forward. The commercial nature of ISIF’s investment mandate is of critical importance and I will return to this later.

The Minister for Finance has said that the legislation to establish the Irish strategic investment fund, ISIF, which will be the NTMA (amendment) Bill, should be published shortly and he hopes that it will be enacted by the middle of the year. This will also involve the dissolution of the National Pensions Reserve Fund Commission, with oversight and management of the ISIF passing to a new overarching NTMA board and its investment committee. The new board of the NTMA will also be responsible for approving the business plan for the ISIF, on which we are working at present. The new ISIF will also hold the NPRF’s directed investments in AIB and Bank of Ireland on behalf of the Minister for Finance.

When established later this year, the ISIF will not be beginning from a standing start. Significant progress has already been made by the NPRF Commission in refocusing the NPRF towards commercial investment in Ireland within the constraints of the NPRF’s current mandate. Some €1.3 billion has already been committed or invested in areas of strategic importance to the Irish economy and the legislation in progress will facilitate the remaining €5 billion plus of the fund’s discretionary resources being invested in Ireland.

Finding and developing investment opportunities will be a key function of the ISIF. To help generate investment opportunities and potential investment partners, the NTMA last month held a market engagement and communication event in Dublin Castle. The event was attended by more than 400 delegates, including representatives of pension fund investors, industry bodies and financial and legal advisers to companies, throughout the economy.

We expect opportunities to be developed for the ISIF from a wide variety of sources, both through our own proactive efforts of the executive team within the NTMA and via third parties coming to us with ideas and proposals. We have an open-door policy and actively encourage people to approach us or our third party managers with any proposals or ideas. By way of information, the presentations from the Dublin Castle event and the related contact details are available on the front page of the NPRF’s website, nprf.ie.

The ISIF is unusual in that it will combine a commercial approach to investment with the requirement to support economic activity and employment in Ireland. There is little precedent globally for sovereign funds investing with such a "double bottom line" so unfortunately there is no well-worn path to follow. Essentially we have twin objectives. As there is no well-worn path to follow, we are finding our own way.

While the domestic focus represents a significant change of direction, the ISIF will share one fundamental feature with its predecessor, NPRF - investments will be undertaken on a commercial basis. It is important to understand what "commercial basis" actually means. In simple terms it means that we have to get our money back plus a bit more. When we disburse money we expect to get it back plus a bit more. That “bit more” is the expected investment return, which will vary according to the risk involved in each investment proposition and this risk-adjusted return should be comparable with other opportunities available to investors. If that definition is met, we can say that it is a commercial investment.

One of the key advantages of the ISIF will be its ability to attract co-investment from domestic and international third parties, such as the China Investment Corporation, CIC, with whom the NPRF has recently co-invested. These investors will only put their money to work alongside ours if they have confidence that investments are made on a commercial basis. Not every investment will have the same expected return, risk profile or timeframe but they must all pass the commerciality test of risk-adjusted return.

This commercial requirement imposes a direct discipline on our consideration of opportunities. However, whenever we make an investment, the fact that we are making a financial return and getting the original investment back means that the accompanying economic impact benefits are, in a sense, free. This would not be the case if we were just spending money from a pot of funds, in which case the State’s resources, once spent, have been depleted. In our case, we expect to get the money we expend back with a bit more.

In seeking economic impact, one of our key criteria will be the “additionality” of the economic impact that results from our investment. That is an important word to bear in mind. It would not be an efficient use of our resources if the resulting impact would have happened anyway – this is referred to as “deadweight", where somebody else would have made the investment if we did not do it. Where the purely domestic-focused sectors are concerned, any economic impact would be lower if we produced gains in one sector at the expense of other players in the domestic economy; this is referred to as “displacement”. For example, investing in a new hairdressing business, which might be a very good investment proposition, would quite likely mean that an existing hairdressing business nearby would suffer if our business did well and there would be limited incremental aggregate economic activity arising as a result of an investment of that nature. Avoiding deadweight and displacement has been a central element of Government policy for quite some time and we will apply those principles in the investment strategy for the ISIF.

In recent months, the NTMA, in consultation with the Department of Finance and a number of other Departments and agencies, has been developing an economic impact framework for the ISIF which will help it identify target areas for investment which have higher potential economic and employment impact, and we would expect these areas of higher potential to make up the lion’s share – approximately 80% – of the new portfolio. Some of the sectors with the lowest levels of deadweight and displacement and, therefore, the highest levels of additionality would be those involved in exports, manufacturing, and internationally-traded services. However, there is also some room, perhaps 15% to 20% of the portfolio, for investments with a lower economic impact on the grounds that they have important short-term benefits associated with assisting and accelerating normalisation of capital markets in Ireland. The capital markets have, obviously, struggled as a result or as a consequence of the financial crisis.

At this stage it is envisaged that the ISIF will include investments in infrastructure, public private partnerships, SMEs, venture capital and private equity. These are broad categories and we can go into more specifics, as necessary, later on. Deployment of the ISIF’s €6.8 billion will take at least three to four years, depending on the opportunities available, and the future shape of the ISIF portfolio will only be clearer over time as these investment opportunities materialise.

It is expected that the ISIF portfolio will involve a combination of investment through funds, such as the SME funds in which we have invested recently, which we will discuss later, and direct investment such as our participation in recent PPP projects. An important element of the ISIF strategy will be, where possible, to act as a cornerstone investor, thereby acting as a catalyst for additional third party investors to participate. This will significantly increase the economic impact that can be achieved with the ISIF’s finite resources.

Due to uncertainty regarding the nature of opportunities that may emerge or will be developed, it is not clear at this stage what will be the nature and shape of the ISIF's ultimate investment portfolio or the quantum of co-investment that can be achieved. There will also be a time lag between the ISIF commitment of capital and when money is drawn down. Therefore, it is not feasible at this stage to estimate in advance what the economic activity and employment impacts might be. In the interim, we are developing our capabilities for collating and analysing data to measure and report on economic impact on an ex-post basis, that is, after the investment has been made. This will require a completely new set of data to be reported on by funds and the underlying companies who are used to reporting financial information to their investors but our mandate will also require them to report economic impact metrics. We expect to be able to publish a preliminary assessment of the economic impact of the investments made to date in Ireland during the second quarter of this year.

Turning specifically to the SME sector, in January 2013 the NPRF Commission announced investment commitments to three new long-term funds that will provide €850 million of equity, credit and restructuring or recovery investment for Irish SMEs and mid-sized corporates.

The NPRF played a significant role in the development of these funds and was a cornerstone investor in each, alongside investment from third party investors. The NPRF has committed €375 million across the following three funds: a €125 million to €300 million equity fund focusing on healthy businesses seeking to grow, including those with over-leveraged balance sheets, which is managed by Carlyle Cardinal Ireland; a €50 million to €100 million turnaround equity fund focusing on under-performing businesses which are at or close to the point of insolvency but have the potential for financial and operational restructuring, which is being managed by Better Capital; and a €200 million to €450 million credit fund focused on originating and acquiring loans to larger SMEs and mid-size companies, which is being managed by BlueBay Asset Management.

In addition to these three funds, in June 2012 the NPRF announced a collaboration with Silicon Valley Bank which will make $100 million of new lending commitments available to fast-growing Irish technology, life science, clean tech, private equity and venture capital businesses. In January 2014, the NPRF announced the establishment of the China Ireland Technology Growth Capital Fund, capitalised at $100 million with equal commitments from the NPRF and China Investment Corporation, which is China's sovereign wealth fund. The fund’s strategy will be to make minority equity investments in fast-growing technology companies and Irish companies that have a substantial presence or strategic interest in China and in Chinese companies that have a substantial presence or strategic interest in establishing a presence in Ireland, most likely as a gateway into the broader European market.

Since these funds were signed, each manager has set up a Dublin office, recruited senior team members, integrated the Irish platform within their wider international business and begun to develop local market awareness of their platforms and investment offerings. These activities have positioned the managers as important new players in the Irish market and as alternative sources of funding to Irish businesses. By its nature, the establishment of a new business activity and capability takes some time but the managers have generated significant deal flow to date. Not every opportunity that is considered results in an investment. Often an opportunity may prove to be unsuitable or it may be that our manager is unable to bring an attractive opportunity to a successful conclusion for various, typically negotiation, reasons. However, across the five different managers, more than 400 investment opportunities have been reviewed. Three of the managers have been in operation for all of 2013, one since mid-2013 and the other since early 2014. There were 400 investment opportunities over that period, and 45 terms sheets, which is a detailed proposal for a transaction, have been issued, resulting in 131 transactions completed to date.

The NTMA is currently exploring additional SME fund opportunities that could complement those already in place, with the objective that the eventual suite of funds would have the capacity to invest across the full spectrum of SME financing needs, including the smaller end of the range where, because of higher operations costs, it may be more difficult to establish the commercial case. Additionally, the NPRF has committed €125 million to the Innovation Fund Ireland programme, a Government initiative in conjunction with Enterprise Ireland to attract leading international venture capital fund managers to Ireland, which has seen some venture capital firms, typically from the US, enter the Irish market.

One of the most salient features of the Irish SME sector is that it relies disproportionately on bank credit as a source of finance. In our view, the solution to excessive corporate debt levels is not necessarily more debt but greater use of other financing means such as equity, where the ISIF can particularly make a difference. Its flexibility to invest up and down the capital structure and over longer time periods means it can provide alternative funding options to complement those provided by traditional banking. Nevertheless, the wider backdrop is a complicated one. Banks and the economy generally, including SMEs, are still in the process of deleveraging, and while this is under way, it will inevitably have a dampening effect on SMEs' appetite for growth financing. The ISIF is not, therefore, on its own sufficient to address the problem but it is an integral part of the overall solution and recovery of the Irish economy. In this regard, the NPRF-ISIF works closely with Enterprise Ireland, the IDA and relevant Government Departments.

That is a summary of where we are now. I would like to make a couple of additional concluding points. First and foremost, I must emphasise that the ISIF philosophy is that of a commercial investor, but with an additional objective of contributing to economic activity. Second, investment is different from spending, and economic impact needs to be considered in that light. Third, the ISIF is only part of the overall solution but an important one, and the NTMA looks forward to building on the progress we have made to date. The ISIF may not formally exist yet but it is very much open for business. We have been developing a transaction pipeline, and along with our external investment partners, we are open to investment proposals and ideas and would encourage committee members, as we have done with the wider business community, to approach us in that regard.

I hope my opening remarks have given the committee a good understanding of our role and our work to date and can serve as the basis for some further discussion today. I appreciate members' time and look forward to their questions.

Chairman

I thank Mr. O'Callaghan for his informative presentation, which has given us all a good update on how the NPRF-ISIF works.

Senator Feargal Quinn

Mr. O'Callaghan's presentation was very impressive and interesting. Most of us were not aware of what the agency is doing. I find that in business one has to have a target. Mr. O'Callaghan stated earlier that a business expects to get its money back plus a little more, which is a little vague. Perhaps he would elaborate further on that. I agree that the ISIF needs full confidence.

Mr. O'Callaghan also spoke about avoiding dead weight and in this regard referred to a newly opened hairdressing salon possibly taking business from a similar existing business. I do not understand that. I would assume that every business has competition. Is Mr. O'Callaghan saying that any new business must be careful not to damage the competition? Perhaps Mr. O'Callaghan would also elaborate on the phrase "term sheet" and say what information is provided in that regard.

Mr. Eugene O'Callaghan

In regard to the target, the phrase used is a layman type phrase to try to make it clear that we need to get more than our money back. In each individual investment we will have an expected return commensurate with the risk involved in that investment. If we were investing in a low risk senior debt instrument in respect of which there was a high probability we would get our money back, we might have an expected return, if it was of short duration, of 2% to 4%. If were investing in the equity of a venture company we might need to get 15%. We would have identified before we started the broad nature of the expected return on an asset by asset basis.

Chairman

Is that fund by fund?

Mr. Eugene O'Callaghan

This relates to the investments by the ISIF. If we invest in an SME fund, we would have agreed with the manager of the fund on the overall return. We would work that through in terms of the expected return from the underlying assets minus the cost of managing and so on. There is a second level beyond that which is portfolio level. The draft legislation, which it is hoped will be published shortly, will require the ISIF at a portfolio level to seek a return above the cost of Government debt. Clearly, an alternative use of these resources for the Exchequer is to take the cash and pay down Government debt. How much we would look, at portfolio level, to exceed the cost of Government debt will be addressed in detail in our business plan, which, as I said earlier, is currently being developed. We could exceed it by 1%, 2% or 4%. If the cost of Government debt is, say, 3% or 4%, we will have to work out the expected return. The calibration of that target depends in turn on how much debt investment as compared with how much equity investment we expect to see in the fund. That target will probably iterate as the opportunities become a bit clearer.

The Senator's second question was around the discussion of deadweight and displacement. These are phrases used by economists. They are economic terms which are not necessarily commonly used every day.

We have had to come to an understanding of these terms as well. Dead weight refers to an investment that would happen without the intervention of the National Treasury Management Agency. There is no additional economic impact to be obtained when the investment would have happened on its own without our involvement. As it will happen anyway, the economic impact will be achieved. There is no point in using the finite resources of the fund to help achieve an economic impact that could be achieved elsewhere. Let me give an example. Initially the ISIF was a potential participant in the financing of a PPP motorway project. It turned out there was more than sufficient demand from the marketplace to participate and provide the funding for the project. Our involvement was not required. We avoided an accusation of deadweight by not participating when we were not needed.

Displacement is more tricky. Our mandate is primarily to support economic activity in Ireland. Let me give an example. Economic activity happens when people go and have their hair cut. If we invest in a good hairdresser as opposed to the existing hairdresser who is in business down the street, the number of clients who will have haircuts will be roughly the same. Our mandate is to try to assist additional economic activity to take place. If we invest in a business that is successful but only displaces another business, that does not create new economic activity. There will need to be a case by case analysis because even in sectors such as hairdressing by virtue of providing very high quality product or service, some businesses can stimulate new economic activity and increase spending that otherwise would not have taken place. That is a much more fine tuned consideration. We need to consider each investment proposition in the context of whether it adds incremental economic activity or displace existing activity.

The phrase "term sheet" is investment market jargon and is the basis upon which a transaction proposal would be put forward and discussed between an investor and an investee company, in the case of a borrower looking for equity. The term sheet would set out for discussion the principle proposed, terms and conditions, the type of investment - whether equity or debt, the timeframe, the rate, the covenants or terms and conditions that might be attaching and the key commercial considerations. The commercial and business issues would have been dealt with at the term sheet stage. Normally when a detailed term sheet is agreed between the parties, the legal documentation process would follow, unless title or other legal issues have been unearthed.

Senator Feargal Quinn

To be involved in this process what is the business background of the team, do they come from banking, finance or economics?

Mr. Eugene O'Callaghan

The team members have a varied background, in a broad sense they are investment managers, so they have all managed assets across all asset classes, equities and bonds, private equity, real estate and so on. Typically investment managers would have strong financial backgrounds, a number would have an accounting or legal qualifications. Within our team we do not have anybody with pure economics, but we have supplemented our resource on two fronts, by working with the various Department and agencies and with external consultant to help us develop an economic impact framework. This was an economics oriented activity with a high level of economics expertise. Our role will be to apply the framework that is being developed with very strong economic credentials. We work very closely with the economics unit within the NTMA. It is involved, not on an investment by investment basis but in terms of the process and how to interpret the various guidelines we are seeking to implement in practice.

Deputy Anthony Lawlor

I apologise for not being present for the presentation. I would have though the National Pensions Reserve Fund, could have had a major role to play at the start of the crisis, but unfortunately the funding of the NPRF was used for the banks. I would have been considering what the former US President Roosevelt operated during the New Deal programme to get people back to work and using the fund for similar initiatives. I am pleased to see the change in thinking so that the fund is being partially used for this purpose. Does it impact on the national balance sheet that some of the funding is being used to invest in infrastructure, companies or private investors? We were always told to worry that it might have a detrimental impact. I know the funding is not large but could it have a detrimental effect on the overall national picture we must present? Will Mr. O'Callaghan address these points?

Again I greatly welcome the investment in public private partnerships. I have looked at a number of local projects, for example a roads project in which the cost benefit analysis is greater than an alternative roads project. I would like to see more involvement in PPPs because the knock-on effect is increased economic growth. This will have positive benefits for the economy. I look forward to the ISIF getting actively involved in PPPs because I see it as a long-term benefit to the pension fund. How will the team deal with the increased activity that will result from the PPPs?

Mr. Eugene O'Callaghan

Deputy Lawlor's first point related to the balance sheet. The National Pensions Reserve Fund or the Ireland Strategic Investment Fund, is a commercial investor and expects to make a return from all of its investments. The EUROSTAT treatment is off-balance sheet. There is no spending or depletion of State resources arising from the activities of the NPRF or the ISIF. Our activities up to now have been and will continue to be off-balance sheet in a sense that there is no increase to the deficit or the national debt arising from our activities. One of the proposed clauses in the new legislation that is currently being drafted is specifically to make that point, that we should endeavour to structure the activities so that they would not have a detrimental effect on the State's finances.

That point links with the Deputy's second question on PPP projects. The PPP projects are off-balance sheet and they do not add to the Government debt, purely because there must be more than 50% of private sector involvement in PPP projects in order for them to qualify as a PPP. Government or Government entities can only contribute up to 50% of the value of PPP projects, the other 50% must come from private sources. There is a genuine sharing of risk between the private sector and the public sector and EUROSTAT is happy because these are well developed rules that EUROSTAT oversees in terms of its auditing of Government accounting.

What that means is that for any PPPs in which the ISIF might be involved, its investment would need to be less than 50% of the total value and the remainder of the balance of more than 50% would need to come from third parties. Should there be any financing gaps in the financing of PPP projects or proposed PPP projects that would meet the cost-benefit criteria the Deputy has described, we would be ready and willing to participate in the projects in order to help bridge those gaps and allow the transactions to happen. We have done this in the case of a couple of PPPs. There was a schools bundle project in late 2012 and the N11 project, which was signed in the second quarter of 2013, in which the NPRF was involved in making a contribution as part of the overall transaction structure which enabled those projects to happen, and without us those projects would not have happened. We participated on a commercial basis to enable that to happen. That was all positive.

Where we see the bigger opportunity in the PPP market going forward is possibly more in the smaller PPPs rather than the larger ones. The larger PPPs typically have large international contractors and their large international financiers who are only interested in playing if they can write large cheques in particular projects. The larger ones and the one I have described that is closing shortly is a larger roads project where our money was not needed, but we would certainly see potential under the Government's stimulus package programme where there is a programme of PPP projects. Certainly, on the smaller to medium-sized projects there is every possibility that there will be financing gaps in those and we would certainly be very interested in participating in the projects where such gaps might exist.

Deputy Anthony Lawlor

What is regarded as a small to medium project? Is is a project under €100 million or-----

Mr. Nick Ashmore

The large-scale investors that provide finance are banks. More recently, financial institutions such as insurance companies and pension plans would typically write cheques of €100 million or more each. Projects that fall in under €100 million are more likely to funded by local banks but there is also an opportunity for us to be there as well.

Deputy Anthony Lawlor

Thank you.

Deputy John Lyons

I have one brief question relating to the PPP model. Both Deputy Michael Conaghan and I would have been members of Dublin City Council before being elected to the House. Although we had some positive experiences of PPPs, of which there are many throughout the country, we also recollect one quite significant negative PPP, where people were waiting for houses to be built, that fell through from one particular side. Is anything taken into account in respect of anyone from the private side who might have been part of a proposed PPP who did not follow through on their agreement, and is such a person blacklisted? Do the representatives take into account any other examples of public private partnerships that have taken place and the ability of those particular companies to deliver or is the slate wiped clean in respect of their past history in Ireland or in other countries?

Mr. Eugene O'Callaghan

Ability to deliver is of critical importance. We come in at a second or third stage of the PPP project process. Therefore, the project will have originated at whatever part of Government or local government wants to initiate the project. Typically, the National Development Finance Agency, or the National Roads Authority in relation to roads projects, has responsibility in many cases for pulling together the project which includes tendering for contractors and consortiums who will design, build and deliver. The NDFA is a sister business unit of ours within the NTMA. It is only at that stage that the financing requirement becomes clear. It is only at that stage that the ISIF, or any other third party providers of capital, would become involved. By the time we get to become involved in projects, we would expect that the ability to deliver has been dealt with. If there are any policy reasons as to why party X or Y should not be dealt with, that should have been weeded out by the time it comes to us. If we had concerns on the ability to deliver, it would certainly impact our willingness to provide finance, but we think it would be unlikely.

Deputy Michael Conaghan

I have a very general question. Whether one is borrowing or lending, confidence in the economy is a significant consideration. Confidence is an illusive entity or a variable, but in terms of the witnesses' experience and skills in measuring what is currently going on, are there high levels of confidence in the economic recovery? From their work and their contacts with people coming to them, do they sense a strong optimism or confidence in this general recovery that we believe may be under way?

Mr. Eugene O'Callaghan

There are two levels to that question which Mr. Nick Ashmore and I will deal with. At one level there is an investor confidence and there is an increasing level of investor interest in investing in Ireland. From the investor point of view, there is definitely quite a high level of confidence. We meet many international investors as part of our activities and it is clear they are interested in investing in Ireland. They are aware we have been through a financial crisis and they perceive that the economy has stabilised, is beginning to be ready for a pick-up and is a good investment opportunity. Part of our difficulty is that many of these are large investment funds and, as Mr. Nick Ashmore said in respect of the PPP projects, they are only interested in writing large cheques and the Irish economy is quite small. If someone wants to write a cheque for a minimum of €100 million or €200 million, it can be difficult to find the opportunity for them to do that, particularly in a single transaction. At investor level, investors are in the business of anticipating the future - that is the essence of investment - and there is a high level of confidence. The other side to it is the people we meet on the ground every day, Irish businesses and so on. Perhaps Mr. Nick Ashmore would comment on that.

Mr. Nick Ashmore

There are two main factors which underpin confidence among businesses as they seek to develop their operations. First is their own sense of their financial capabilities and their instability of operation and second is their sense of opportunity. Is there an opportunity that is well defined and well understood on which one can take a risk and be confident of making a return by borrowing or taking out more equity to make an investment? There is still a sizeable cohort of businesses suffering the hangover of the boom in terms of exposure to real estate and real estate investments they may have taken on. We are aware that banks are working their way through resolving those books and trying to stabilise their situations as quickly as they can, and I think they are substantially through that process now. That is a factor in the number of businesses that are prepared to start looking forward as opposed to looking over their shoulder and wondering when the banks will come and tap them on the shoulder, so to speak. I think that is starting to improve.

In terms of opportunities, we can only reflect on the flow that is coming in the door. That certainly seems to be picking up in terms of businesses coming to us with ideas and seeking capital to make investments and to start building out and growing. On that front it is starting to improve. We also look closely at the quarterly SME lending surveys in which the Department of Finance engages. They show a pick-up in demand for finance by SMEs. I think that reflects both of those sets of changing conditions.

To elaborate just a little, we are tracking within our own operation - this is a mix of direct investment ideas but also of fund investment ideas - more than 60 opportunities which are in the pipeline.

Approximately two thirds of these are what we call radar opportunities, which are opportunities we are only starting to understand and develop. We run economic analysis on these opportunities so that we can see what type of economic impact they would have. There are approximately 25 different stages to our due diligence, legal review and approval process. We have to take these opportunities to the Commission in the first instance and, ultimately, once the legislation has been amended, to the new ISIF governance structure.

I hope that provides members with an idea of the volume of opportunities we are seeing. Many of those are funds which will go on to make ten to 30 investments themselves. Not all of them will work because not all of them are good ideas. Some are good ideas and others are less good. We endeavour to respond negatively if we believe a proposal is not viable.

Chairman

Are the radar opportunities all funds in which NPRF-ISIF can invest? Can it invest directly in a business? Perhaps Mr. O'Callaghan would talk us through the process in terms of how the agency can be approached by, say, a group which has a €30 million fund it wishes to invest. In other words, if a company has a good business idea, does it approach one of the fund managers or the agency?

On the agency's day-to-day business, does it deal with the managers on a regular basis or do they report to it within set timeframes? I presume the managers are in charge, with the guidance of the agency. I would welcome Mr. O'Callaghan's response to those questions.

Mr. Nick Ashmore

In terms of the process, it is a mix of inbound and outbound approaches. In terms of an inbound approach, an offer comes to us. Teams hear about the opportunity to raise funds from us and approach us directly or through contacts. This is a highly networked environment. It takes little to get a contact to introduce an idea to us. We find this happens on a regular basis. We have been developing intermediary relationships over the past couple of years, culminating in the market engagement event which took place last month. We try to be as accessible as possible. The degree to which we can do this is a reflection of the team.

Another approach involves our identifying an opportunity, to which we take a much more aggressive outbound approach. The BlueBay Assessment Management fund, Carlyle Cardinal Fund and Better Capital Fund are all results of a proactive process by ourselves identifying a gap in the market, sourcing a manager and encouraging the making of a proposal to us, which we then run through our process. Once we have a firm proposal, we conduct our own due diligence and do our own referencing. We also analyse the financial models and risks, potential pitfalls and any legislative requirements, etc. We then review the proposal and create formal investment proposal papers before taking those to the Commission for approval. Once we have approval from the Commission, we then move to a legal and taxation due diligence process where we finalise the agreements and move to close. The fund is then up and running and committed.

In regard to direct investment, we have seen few of these to date. However, they are starting to come in. To engage on a direct investment, we need a substantial investment opportunity. Our minimum investment size to date has been approximately €5 million to €10 million. For a fund commitment, it would need to be €15 million and above. For a direct investment it would be higher than that. If it is not higher, it is quite likely that we would steer that opportunity to one of our funds, if there is one in place. If it is a generalised private equity opportunity, which is a €20 million investment, we would steer that to Carlyle Cardinal or other players in the market. If it is a distressed business of any scale, we would steer it to Better Capital and if it is a business seeking a loan of between €5 million and €45 million over five or six years, then it is ideally suited for BlueBay. We try to complement rather than compete with these managers because they too are bringing other funds to play. We have a small team and they provide us with a great deal of leverage. They will also run similar investment processes and will have their teams review proposals and carry out their own due diligence. They also have their own legal and corporate finance advisers to underwrite the investments.

Mr. Eugene O'Callaghan

We are very keen that the marketplace in general would engage with us. A formal proposal in a bound document is not necessary. Much of the time the process commences with a telephone call and an idea, following which the proposal is drawn up on a couple of pages which we then review. We work with the party seeking the finance to help shape and develop the proposal. I must emphasise that we are not looking for perfection on day one, far from it. Ideas and concepts on day one is perfect.

Mr. Nick Ashmore

On the Chairman's final question in regard to the managers to whom we have deployed capital, we run a good monitoring process around our managers. We have substantial investors in respect of whom we work with our managers, in particular in regard to what they are up to on a monthly basis in the context of the changing mandate. These are the first examples of what we are doing and we need to ensure they are working, that the managers are getting everything right and that if there are any problems we can step in and sort them out as quickly as possible.

Chairman

Is it the agency's view that it is best to have external managers managing funds or is that best practice?

Mr. Eugene O'Callaghan

There is a business strategy question as to how much of the fund we would invest directly and how much we would invest through third party managers. Ultimately, the split between the two remains to be decided. I am certain there will be some of each. For high volume lower value transactions, it would not make sense for our small team to try to get involved. Equally, if there were high value low volume transactions, it would not necessarily make sense to hire somebody else to do something we could relatively speaking do ourselves. There is also a specialist skill question. In other words, if we were investing in, say, bio-tech companies or something like that in respect of which scientific knowledge is required, unless we felt that we had a programme that we could definitely do for the next five or ten years and it was worth bringing that skill on board, typically we would go through third party managers who already have those specialist skills in place.

Chairman

Is €5 million the lowest in terms of investment?

Mr. Nick Ashmore

Some of the funds will go down to €2 million in terms of investment. One of the challenges we are currently experiencing, on which we are working, is trying to identify ways in which we can deploy capital towards proposals of below €2 million. There are many small SMEs in this country, towards which other Government measures such as Microfinance Ireland and the loan guarantee scheme are targeted. If we can find a way, commercially, to deploy capital in this area, be that through an invoice discounting facility or a trade financial facility and so on, we will seek to do that.

Chairman

We recently met with a delegation in relation to peer-to-peer or crowd financing. Is this an area of interest to the agency? The committee also does a great deal of work around social enterprise. Although social enterprise does not create jobs, it can create profits and there is also a social agenda to it. The committee is of the view that social enterprise should be treated the same as other enterprise. Can the agency work with these enterprises, which, as I said, can create profits? Is it the view of the agency that once an enterprise can make a return the agency can work with it?

Mr. Nick Ashmore

On crowd financing, there are two flavours to this, namely, crowd financing and crowd equity investment, which while not very prevalent here is prevalent in the US through groups such as Kickstarter. On crowd financing, we have had some discussions with groups involved in this area. Subject to the size of the investment, which is the challenge for us in terms of doing something at a low level, we believe there is an opportunity in this area, in the same way as there is in the UK where the government has been able to supplement the activities of these funds and programmes. To the extent that we can identify a good risk adjusted return within the financing that we would be deploying, there is no reason we should not be able to participate.

Mr. Eugene O'Callaghan

On the question around projects with social-type benefits, ultimately if any proposition can be constructed on the basis of being a commercial investment, where money is disbursed and we can get money back over time and there is an appropriate rate of return for that, we can consider it. We have had one or two preliminary conversations in regard to the social housing area. It is not necessarily an easy nut to crack but there is no reason, if a project is framed as a commercial investment, that we cannot look at it.

It is not necessarily an easy nut to crack, to be honest, but we would be happy to look at it if it can be framed as a commercial investment.

Chairman

I have some final questions. I am very familiar with the terms "displacement" and "deadweight", having served on enterprise boards. They often can be used as an excuse, although I am not saying that will happen in this case. I understand why it is essential to have those terms as well, but sometimes they can be overused to the letter of the law. In the case of displacement, for example, and we are hoping you would invest in exporting companies, if a company is currently exporting to the UK and expects to move on to France and other parts of Europe at some stage in the future, and there is a second applicant who wishes to export the same product or service to France and Germany, is that regarded as displacement? That is my concern. Sometimes something is knocked on the head too quickly because it is considered to be displacement. It is easy to understand that in respect of a small business such as hairdressing, but you are dealing with millions of euro. What are your thoughts on this at a bigger level?

Mr. Eugene O'Callaghan

Two points can be made in response to that. One is that from the point of view of economic activity in Ireland, exports are always good. If there is a company exporting to France and another company wishes to export to France in the same sector, there is no problem with that. Exports, and the more we can export, add to the economic activity and employment in Ireland. That is absolutely certain. There are couple-----

Chairman

Is that the case even though they are chasing the same market?

Mr. Eugene O'Callaghan

Yes. The reality is that if one of them has 100% of the market in France, there will be a market in Germany, Italy and so forth for good companies.

Second, you mentioned the concept of displacement possibly being used as an excuse. We are actually quite the converse. Our biggest objective is to deploy the €6.8 billion on a sensible commercial basis in Ireland. We are looking for the opposite, namely, the reason to do things. However, we also make the point, which we have not emphasised in this conversation, that we have allocated 20% of the fund to assist with the normalisation of capital and financial markets in Ireland, even where there might be displacement. Clearly, it is a question of whom one believes and obviously there is plenty of public discussion about the state of financing of the SME market, but even if one assumes that there is some dislocation there compared to normal, we would certainly be prepared to participate even where there is displacement just to help accelerate the normalisation.

Mr. Nick Ashmore

The three funds we discussed this afternoon are completely sector agnostic. They are not restricted from any sector, apart from real estate. We will try to keep them away from that.

Chairman

As there are no other questions, I thank the witnesses for attending. Over the next couple of months the committee will be examining the area of SME lending because, as you said in your statement, we are very linked into traditional banking finance. Representatives of InterTradeIreland appeared before the committee last week and they compared Northern Ireland to the Republic. Both North and South are far too heavily reliant on traditional banking. We are examining all the other options to raise money, so today's discussion was very worthwhile, informative and detailed. I appreciate that. I know that is hard to achieve before a committee, so thank you for that. Our report will be ready in May or June so we will feed back to you at some stage.

The joint committee adjourned at 2.54 p.m. until 1.30 p.m. on Tuesday, 15 April 2014.