Irish pension funds allocate less than 0.01% of their portfolios to local PE and VC funds, considerably less than their European counterparts. Pension funds could be an important source of capital for impactful SMEs
The Irish Venture Capital Association (IVCA) has made a pre-budget submission calling on the Irish government to facilitate Irish pension scheme investment into local enterprises.
The association has argued that Ireland’s ability to develop world class tech firms is threatened by over reliance on foreign investors. According to the IVCA, last year, 57% of overall venture capital funding into Irish companies came from investors outside Ireland, whilst Irish pension funds, which invest primarily in equities via equity-focused investment funds, have allocated less 0.01% of their portfolios to Irish PE and VC funds.
The IVCA said it believed that this level of reliance on overseas investment threatened the growth of companies’ operations in Ireland and companies’ ability to remain Irish, and represented a financial risk should the global economy shrink, and overseas capital become less available. The association said they were “also keen that Irish pension savers should have an opportunity to participate in the future of our (the Irish) economy”.
Leo Hamill, chairperson for the Irish Venture Capital Association said: “Irish pension funds seriously lag the rest of world when it comes to VC investment. Public pension funds contribute 65% of the capital in the US VC market, 18% in Europe and 12% in the UK. Here it is estimated to be significantly less than 1%.”
The IVCA recommended introducing an “opt-in” requirement on new payments into pension schemes, giving members the option to allocate a small proportion of their pension to a fund supporting Irish industry. The association said that even “a small increase in domestic venture and private equity allocation would have a significant positive impact on the availability of capital for high-growth innovative businesses.”
Speaking to Impact Investor, Sarah-Jane Larkin, director general for the IVCA, explained the gradual disappearance of defined benefit (DB) pension schemes was partly to blame.
“In the past, these large schemes, often from semi-state bodies, invested in venture capital in Ireland because they were more incentivised to invest in the country’s future. With changes to retirement age and work patterns, and the privatisation of many firms, the pension fund landscape has changed and VC and PE investment in Irish firms has fallen through the cracks along the way.”
Environmental and social impact
In its submission, the IVCA mentions the importance of allocating capital to Irish businesses working in artificial intelligence, blockchain, digital and deep-tech but Larkin said this would also help channel capital to Irish entrepreneurs developing solutions offering environmental and social impact.
She said: “Pension funds could provide a source of capital to social and environmental SMEs and start-ups, and complement state investment and other sources of private and institutional investment. I am sure most citizens would be quite happy for a few percentages of their investments going to impactful enterprises that are contributing to solving the challenges we’re facing today. They could even mandate that VCs themselves have some percentage of their investment capital allocated to social enterprises.”
The IVCA also highlighted the impact of the 2008 law to modernise the French economy, which among other things mandated that corporate employee savings schemes offered a solidarity investment funds option, allowing employees to allocate capital to social enterprises and other socially and environmentally focused organisations.
This, the IVCA said, had “resulted in significant growth in the amount of capital allocated from €200m to €6bn between 2002 and 2016”. The intent of the proposed “opt-in” would be to emulate the successful implementation of the French scheme. A recent scheme in Germany was also given as an example.
Larkin said: “Other EU countries and the UK have already implemented or are planning to source VC investment through pension funds. For example, Germany has just announced a scheme to invest €30bn into venture capital through pension fund assets and institutional investors.”
Aisling Healy, director of finance for Initiative Ireland, a financial services start-up specialising in funding energy-efficient, social and affordable housing loans across Ireland, said: “We agree that access to early-stage capital to scale indigenous companies is scarce in Ireland. There are a wealth of innovative, unique businesses ideas coming out of Ireland and yet early-stage funding is usually hard to access the more innovative you are. As a company, which is scaling ourselves, we have experienced first-hand the local market restrictions.”
Healy said that more than the risk of having to rely on foreign capital, Irish investors were missing an opportunity: “It’s a shame that many companies seeking to scale should have to partner with foreign capital rather than accessing capital here at home.”
Asked whether giving members the option to allocate a small proportion of their pension to a fund supporting Irish industry would have a positive impact on capital flows towards social and environmentally oriented enterprises, she said: “If we expect to see ESG impacts from the funding of indigenous companies, then it needs to be a reporting requirement. Transparency will always increase ESG outcomes. As an ESG finance platform, we’ve seen that first hand.”