“Thinking in decades, making a difference.“ This is really our long-term time horizons and our additionality.

In March 2019, Eugene O'Callaghan – Director of the Ireland Strategic Investment Fund (ISIF), where he has overall responsibility for the management of the fund – discussed with the IFSWF team how ISIF contributes to Ireland's economic development strategy.

O'Callaghan explains how the fund invests “on a commercial basis in a manner designed to support economic activity and employment in the State”.

This unique mandate reflects a shift from being a sovereign wealth fund focused solely on wealth creation, to a sovereign development fund with a “Double Bottom Line” objective. 

Could you tell us about the origins of the Ireland Strategic Investment Fund and its mandate? How has it evolved over time? 

This is a saga that goes on over almost 20 years now. The fund was set up at the turn of the century and was known as the National Pensions Reserve Fund. And this was a classic [saving] sovereign wealth fund which was investing globally and was aiming to build a pool of assets to support public sector and social welfare pensions in Ireland between the year 2025 and 2055. So, this was an intergenerational fund. And we were investing away and doing quite well. By the time the financial crisis hit Ireland particularly badly in 2009-2010 our fund had grown to €23-24 billion [$34-35 billion] which was about 10% of [Ireland’s] GDP. Ireland then entered into a €85 billion [$115 billion] programme of financial support with the IMF, the European Commission (EC) and the European Central Bank (ECB). Ireland contributed €17 billion and the bulk of that money came from our fund in phases between 2009 and 2011. So the mandate for our fund was changed. At that time, under direction from the Ministry of Finance, we essentially invested in rescuing the two main banks in Ireland which were in major distress at the time. So, 80% or more of the assets of the fund were used to bail out the Irish banks in 2009-2011. At the time, there was no capital in Ireland no capital flowing whatsoever. It was a very difficult time. But by 2013 the new government had got to deciding that the National Pensions Reserve Fund should be converted into a strategic investment fund. And this was when our new mandate [came to place]. So this is the third phase of the fund: from global investor and then bailing out the banks and then the third phase as a strategic investment fund with a mandate to invest on a commercial basis to support economic activity and employment in Ireland. We've been in full operation under that mandate from 2014 onward. In more recent years the Irish economy has recovered dramatically, way better than anybody might have envisaged back in 2012-2013 and so recently the Minister for Finance has revised our mandate. Now ISIF 2.0, the second version of the strategic investment fund, still has the same broad double bottom line mandate for commercial investment and economic impact. What we've been asked to focus on, is five particular priority themes that are relevant to the Irish economy at the moment. So we're a long-term investor but we are much more focused than we may have been in the first year of our existence as a strategic fund.

You have a mandate to invest on a commercial basis to support economic activity and employment in Ireland. How do you actually assess what it is that you're going to invest in? We understand you apply as it were three economic concepts to any project. Can you talk us through those?

We apply several economic concepts. The most important one is additionality. This is around additional incremental economic activity in Ireland that will arise as a consequence of our investment. So this can be manifested in terms of gross value-add, which is the value added by a company or an enterprise and which the total of all gross value adds to the GDP in an economy. So it can be manifested through that. It can come through additional jobs and they can be nearer term additionality or it can be longer term additionality that's enabled by our investment. This would classically be in infrastructure or in a real estate type of transaction that would enable future economic activity that would not otherwise be enabled. So additionality is what we're looking for.  What we seek to avoid are the two economic concepts of displacement and deadweight – where and if we invest in a business or an enterprise and it does well at the expense of another similar business or enterprise in the economy, then that impact on the overall economy is zero. We've used examples we wouldn't invest in such as hairdressing chains, because even if we invest in a good hairdresser the same number of haircuts would be consumed in the economy and a good hairdressing chain will cause another one to go out of business down the road. The second concept we look to avoid is a deadweight financial base. This has become really important, as the economy has recovered and we don't want to be replacing or competing with ready sources of capital that the private sector would provide because if we're competing with the private sector, and not providing something additional to the private sector, we're not adding any incremental benefit and this sort of economic activity would arise anyway. So we constantly look to avoid being in situations where there is already a supply of private-sector capital. So we're looking for positive additionality and to avoid displacement and deadweight.

That's very interesting, especially for those IFSWF members that have an element of strategic investment to their mandate. As a long term investor you can invest anywhere in the capital structure. Could you talk us through how is that beneficial to the overall economic activity?

What we find when we apply our economic impact principles in practice and we've got to identify where we are different from the providers of finance in the markets in general. It's a bit like a business trying to understand why their product is different and better at satisfying a customer need. We had to identify where we're different, and what we found is three significant areas of differentiation. The first one is a very long-term timeframe, so we can invest out for 20-30 years if necessary. And that's well beyond the investment horizons of most providers of private capital. Certainly any providers of private capital who are willing to take any risk that's not a very long-term government bond. Second, we have flexibility as you mentioned to invest anywhere on the capital structure. So what this means is that we can invest in safe, secure debt or we can invest all the way through to equity in an early-stage startup business, which could be quite speculative in nature or high-risk, or anywhere in between. And what that means is that we have the flexibility to bridge the gaps in the capital structure. Sometimes we find that banks are willing to do X and maybe the sponsors of the project have Z but the project needs X plus Y plus Z. And we can provide the “Y” that's missing. And often that will be at a higher risk point in the capital structure than the bank, but maybe a lower risk than a junior equity position for example. This flexibility means we're happy to do that as long as we get paid for the risk that we take. So we constantly look at risk-adjusted expected returns and make sure they're appropriate. This flexibility also means that the market and companies who are sponsoring transactions can talk to us if they have a capital gap, knowing that whatever the capital gap is we can fill it. We certainly had situations in the past where we have been asked to look at long-term debt. In a particular opportunity where we might like the company and its product and its customer base, but we might take the view there's too much debt already and we could invest ordinary equity or maybe preferred equity rather than debt to give the company the resilience it would need to withstand downturns and so on. So this provides that flexibility, what has proven to be an extremely important part of what makes us different. Our third differentiator just comes with being a sovereign fund. It's good for the investee companies dealing with their customers, even when looking to hire staff they're obviously advantaged if they have a sovereign fund on their shareholder register. Secondly, it's really important in dealing with other co-investors, it [helps] other people investing alongside us in the transaction. Then this co-investment is something that's very important to us so we can get more bang for our buck and we can get more economic activity for less of our money the more co-investors we can have beside us in transactions. Clearly, the commercial sovereign investment partner is a huge comfort blanket for prospective co-investors both domestic and international. So in summary what makes this difference is long-term flexibility and being a sovereign investor. All of those combined add to differentiating our investment from other players. 

If we could look at perhaps a couple of examples of those partnerships that appear to really illustrate those points that you made about patience, flexibility and the sovereign nature of the fund. First, you have just renewed a partnership with China's CIC Capital. Could you just tell us a little bit more about it?

We've invested 50% each of ourselves and China Investment Corporation, initially in China-Ireland Technology Growth Fund. This is a private-equity, venture-capital fund that is looking to invest in both Irish technology companies at a growth stage who would be looking to access the Chinese market, and Chinese technology companies who may be looking to access European markets and would use Ireland as a base for that. What's very interesting is the general partner of this China-Ireland Fund is a joint venture between two general partners: an Irish general partner that we had known very well for a number of years, and a Beijing-based general partner which the China Investment Corporation had known for many years. And they came together on a 50/50 basis as the GPs on this fund and both the Irish and the Chinese GPs have people on the ground in Silicon Valley. Again this is really important for the technology sector. So that first investment, which was entered into in 2013, has gone very well, and in 2018 we went again with a second fund. Again 50% invested by ourselves and 50% by China Investment Corporation. What we have found, and the underlying investors have found, it has made a terrific difference, and in terms of being able to navigate other countries, for Irish businesses being able to navigate in China, or prospective Chinese businesses being able to navigate the Irish system. Having sovereign funds and having their connections and networks available has made a huge difference.

Is that a model for the recent announcement you've made with the IFC, the International Finance Corporation?

Well, that's actually quite different. We've signed a memorandum of understanding with IFC, but there's no capital committed yet. What we are committed to doing is to collaborate with a particular focus on the food sector in Ireland, which is our domain, and the emerging-market economies, which is IFC’s domain, and we are seeing how we can work together and we'll be looking for opportunities for Irish food businesses in particular to develop export markets and new export markets. And for IFC, and the emerging-market countries and businesses that they're working with,  who may be looking for a higher-quality product and also expertise and experience in food production. So ultimately we will be hopeful that we may be able to be part of joint ventures coming together to build better bridges between the Irish food sector and a number of emerging economies.

There's an extent of which you are trying to if not create demand then at least make it easy for that demand to be satisfied within both your domestic Irish market but also the overseas market as well. Is that fair to say that's what you're looking to do?

Yes. I think the way I would look at it I suppose is that our investment style is based on concepts like networks and collaboration and taking the view that we're all globally connected these days and nobody can do it all themselves. And part of what we can do is, through joint ventures, bring great international capability together with the capability that's in Irish businesses and hopefully get a better result than anybody would be able to do on their own. So the whole idea of networks and collaboration is a really big underlying principle in our day to day.

What do you think are the absolute keys that have made the Ireland Strategic Investment Fund so successful?

I'd say our success has been built on two or three things. One is our flexibility that I mentioned earlier. That's been really important. I think that with the fact that we've had an economic impact framework which is sort of simple but which is rigorously applied on every single transaction and is embedded in our process and that has meant that we have done there has been an economic impact. I would say a third point then is the nature of the individuals in our team who have all started out with the fund. We didn't know if this could be done. We needed people with get up and go attitude, who would try things. We wanted individuals with design skills and structuring skills and negotiation skills. We had quite a lot of them in our team of around 40-45 people and that's been really critical as well. So in summary flexibility, our economic framework and the capabilities of the people in the team have been the important drivers. And I would add one further sort of outcome is that we have invested widely across the Irish economy in infrastructure and energy, commercial real estate and housing, food and agri-technology as well as the health care sector and into SMEs. And that has helped us build acceptance and visibility on what we're doing. So that has been an important consideration as well.

Looking forward to the next few years and how you invest, how would you summarise how you think about it?

We use the phrase: “Thinking in decades, making a difference.“ This is really our long-term time horizons and our additionality. That's really how we want to operate and be seen thinking in decades and making a difference.