18. The SWF’s investment policy should be clear and consistent with its defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing body(ies), and be based on sound portfolio management principles.
18.1. The investment policy should guide the SWF’s financial risk exposures and the possible use of leverage.
18.2. The investment policy should address the extent to which internal and/or external investment managers are used, the range of their activities and authority, and the process by which they are selected and their performance monitored.
18.3. A description of the investment policy of the SWF should be publicly disclosed.
Investment Strategy - Global Portfolio
The Global Portfolio Transition Strategy (GPTS) is designed to position the ISIF to transition from a largely global portfolio into an Irish Portfolio as investment opportunities in Ireland are executed and drawn over a period of years. The GPTS is a relatively low-risk multi-asset class and multi-strategy investment approach, managed by external global asset managers. The GPTS is approved by the Agency, with its implementation delegated to management.
Investment Strategy – Irish Portfolio
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.
ISIF is designed to be a long-term fund, is not subject to liquidity requirements, and aims to be a source of permanent or patient capital. The Minister for Finance may, after consultation with the NTMA, direct payments (essentially dividend like payments) from ISIF to the Exchequer of up to 4% per annum of the ISIF’s value. No direction to make such a payment can be made before 2025. This right is separate from and in addition to the right of the Minister for Finance to direct that the ISIF be invested in certain investments in specified circumstances, according to Sections 42 and 42A of the 2014 Act.
In the Irish Portfolio, ISIF generally takes minority equity stakes and invests on equal terms with private investors to (i) generate a multiplier effect and (ii) ensure compliance with the Market Economy Investor Principle for the purposes of EU State aid rules. When ISIF is a cornerstone investor, it may seek preferential terms relative to non-cornerstone investors. In addition, while it may be the sole or largest debt provider to a company, ISIF seeks to represent less than 50% of the overall capital structure of its investee companies (counting debt and equity).
The State aid aspect is critical. As a government agency, ISIF must ensure that its investments do not breach EU rules preventing unfair financial support for private sector enterprises. Every ISIF investment is subject to a strict vetting and cost-based analysis process in this respect.
In the Irish Portfolio, ISIF invests both directly and indirectly through third-party managers, with a target ticket size for direct investments of generally above €10 million. When it invests directly, ISIF has the flexibility to invest across the capital structure – from secured debt (rated or unrated) to venture equity.
Irish Portfolio Investment Process - External Milestones
External Milestone A: “Confirmation of Interest” At the appropriate time during the Initial/Active Engagement stage, a Summary Investment Paper (SIP) is to be prepared and presented to an “Assessment of Interest Meeting”. The SIP is to be recommended by the Proposer and supported by the Proposing PMC Member.
External Milestone B: PMC Support. Following more detailed assessment of the opportunity and receipt and review of a business plan, financial accounts/projections, economic impact, risk/return etc., a Preliminary Investment Proposal should be prepared and presented to the ISIF Portfolio Management Committee for review and decision.
External Milestone C: Investment Committee Approval Following the completion of all material due diligence, a detailed “Investment Committee Paper” is presented to the Agency Investment Committee.
External Milestone D: Deal Execution / Contract Signing A series of internal and external requirements must be followed and completed prior to deal execution/contract signing, including detailed legal review by internal and/or external legal teams and range of due diligence reviews and sign-offs.
ISIF has adopted a Portfolio Diversification Framework for the Irish Portfolio that sets investment limits based on maximum exposures by sector and by risk category. Compliance with the double-bottom line mandate is the overarching principle of ISIF’s strategy. Sectors include food & agriculture, energy, financials, healthcare, infrastructure, IT and real estate. Risk is scored on a scale of 1 to 5 based on the type of instrument and layer of the capital structure.
Furthermore, maturity, competitiveness, leverage and downside protection (e.g. through contractual clauses or seniority in the capital structure) of the respective investments are also considered. Investment limits are based on the market value of the investments. In addition, ISIF’s total exposure measured as market value plus undrawn commitments is monitored as it provides an indication of the portfolio’s future evolution.
Limits are normally reset on an annual basis. The revised investment strategy published on 1 February 2019 is expected to result in a somewhat increased concentration (as a percentage of the overall fund) in particular sectors (such as real estate) and in investments with a higher risk score. These concentrations will be driven by the refocus of the ISIF’s investment activities on the five economic priorities (regional development, housing, indigenous businesses, climate change and sectors adversely affected by Brexit).
ISIF can diversify its portfolio outside of Ireland, in particular by investing in global funds that will deploy part of their capital to Ireland. Investments in global funds that invest in Ireland can enable ISIF to reduce its Irish exposure and gain a more globally diverse exposure, while still generating an economic impact in Ireland.
ISIF also performs an “all-weather” analysis to test how the Irish Portfolio performs under various scenarios of GDP growth and inflation. This is done by examining how the discounted cash flows of individual investments are impacted by growth and inflation and subsequently aggregating figures at the portfolio level.
At the transactional level, the ISIF applies a disciplined approach to designing capital structures and investment analysis. ISIF’s risk team is responsible for producing a risk assessment, for each investment and the Irish Portfolio as a whole. 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 Agency) prior to investment approval.
The latest ISIF Investment Strategy (1 February 2019) is published on the ISIF’s website: https://isif.ie/news/publications
ISIF has an increasing focus on monitoring investments in the Irish Portfolio as the Fund moves into a more mature phase. Currently, ISIF monitors investments on an ongoing basis (for instance through quarterly calls and meetings) and this is formalized in quarterly reports to the Investment Committee and the Annual Control Report that is presented to the PMC. The ISIF has recently appointed a Head of Monitoring responsible for monitoring all Irish investments.