National Pension Reserve Fund’s move into SME finance fills a gap left by the departure of foreign players

With almost €1 billion in new funds to invest, the National Pension Reserve Fund’s foray into SME financing is good news for small businesses starved of funds.

But does it make sense for the NPRF, or its manager, the National Treasury Management Agency (NTMA), to be getting involved in banking; how can companies access the funds on offer and why are the managers running them so familiar?

Announced last Wednesday, the initiative will see some €850 million of funds flow towards the small- and medium-sized enterprise (SME) sector, and has thus far been warmly welcomed.

Mark Fielding, chief executive of representative association ISME, said the initiative will “address part of the Irish banking sector’s failure”, while Avine McNally, assistant director at the SFA, noted the funds “have the potential to deliver financing to support expansion and assist those firms that need to restructure for survival”.

So what’s on offer? And how can SMEs get their hands on it?

In total, €850 million will be made available, with the NPRF putting up €500 million. The investment will be divided three ways, with one fund, the SME Credit Fund, engaging in lending, and the other two offering financing via the acquisition of an equity stake.

The €450 million credit fund will be managed by fixed income specialist UK firm BlueBay Asset Management and it will lend to larger SMEs and mid-size corporates. Loan sizes will range from €5 million to €50 million, with an estimated average size of €15 million. The fund is expected to be operational by early in the second quarter of 2013.

Focus on investing

The SME Equity Fund will have a total size of between €300 million and €350 million, with commitment from the NPRF of €125 million. It will focus on investing in “healthy businesses seeking to grow, including those with over-leveraged balance sheets”. The fund, which has received commitments from other third-party investors, is already operational and is managed by Carlyle Cardinal Ireland. It will acquire stakes valued at between €2 million and €50 million.

Finally, the €100 million Turnaround Fund, which has a commitment of €50 million from the NPRF and will be managed by Better Capital, “will invest in under-performing businesses which are at or close to the point of insolvency but have the potential for financial and operational restructuring”. According to the NPRF, it’s likely that this fund will make a small number of investments in the tens of millions.

But while McNally has welcomed the initiative, she did express a concern as to whether or not SMEs will be able to access the funds. The funds will be marketed to SMEs by the respective fund managers via intermediaries and financial advisers as well as co-investors, but given that they are to be run on a commercial basis, it may be a case of “Don’t find us, we’ll find you”.

After all, experienced fund managers will have a fixed set of criteria that potential investments will need to fall into. And these investments will need to stand a chance of offering a decent return to the investors in the funds. In 2011, the NPRF’s private equity portfolio returned 6 per cent, while these managers often target considerably higher returns.

But without the emergence of these funds on the Irish market, cash-strapped companies may have nowhere else to turn. Indeed, the point of NPRF engaging in the quasi-banking space is to fill a gap that it says has opened up as a result of the departure of foreign players from the scene.

Speaking last week, Eugene O’Callaghan, investment director at the NPRF, said that the funds came about to fill the gap created by banks vacating Ireland. He said that they will bring new “dynamism and activity” to the market.

The NPRF has some form in this area, having also acted as a cornerstone investor in various funds through the Innovation Ireland Fund initiative. But if there’s a 15 per cent return to be made from lending to Irish SMEs – and it has been speculated that this is what BlueBay will be targeting – should it not be the domestic banks, in which the Government has such a large stake, who are making it?

While O’Callaghan asserted that the funds won’t displace existing lending activities, whether they will pose a competitive threat to these institutions or not remains to be seen, but it won’t inhibit the NPRF from bringing new products to the market. It is looking to bring a “suite of funds” to the market that would have the capacity to “invest across the full spectrum of SME financing needs”.

The NPRF’s fund managers Who they are and what they specialise in

Better Capital

One of the UK’s most high-profile private equity groups, Better Capital is a turnaround specialist, favouring distressed assets. It’s perhaps best known in Ireland for its acquisition, in 2010, of the debts of Calyx from Anglo Irish Bank, which it acquired at a discount.

It is led by the formidable Jon Moulton, who told the Financial Times in 2010 that one of his best features was his insensitivity. “It lets you sleep when others can’t,” he said.

Last year he told The Irish Times that allowing companies to “roll on with silly balance sheets” was bad for the economy and slows down growth. Instead, he expressed a preference for doing restructurings sooner rather than later. “Do it too fast rather than too slow,” he advised.

Better Capital will open an Irish branch this month as part of the deal and will manage its investment through the BECAP12 Fund, whose investments include the fashion group Jaeger and Everest, a Pvc window manufacturer.

This fund fell in value by 1.7 per cent between April and September 2012, while an earlier 2009 fund, whose investments include the aforementioned Calyx, returned 34.3 per cent over the period.

BlueBay Asset Management

BlueBay is a specialist manager of fixed income and alternative investment products, and thus far has had a lower profile in Ireland. Based in London, it manages almost $50 billion for institutions and high net worth individuals.

It was acquired by the Royal Bank of Canada in 2010 for almost €1.2 billion, and is now a part of the bank’s asset management division. With many fixed income products offering historically low yields, investing in Irish corporates could offer an attractive yield to investors.

Last year, BlueBays Investment Grade Bond Fund returned almost 15 per cent to its investors .

Carlyle Cardinal

These names should be familiar to many, given their involvement in various much publicised efforts to acquire Irish banking assets.

Firstly, the Carlyle Group, a global alternative asset manager with almost $160 billion in assets under management. Back in 2008 it joined forces with other private equity groups to form Mallabraca, an investment vehicle formed to acquire Anglo Irish Bank before it was nationalised.

Cardinal Capital Group is a Dublin and London firm led by Nigel McDermott and Nick Corcoran, and was part of the consortium that put €1.1 billion into Bank of Ireland in July 2011, thus saving it from being majority owned by the State. It had previously failed, as a leader of a consortium, to take over EBS Building Society, on the grounds that its bid was not “sufficiently commercial attractive to the State”. Together, Carlyle and Cardinal will run the SME Equity fund.