When you read, as we did last week, that the Ireland Strategic Investment Fund and its US and UK hedge fund partners have invested in only 13 Irish businesses to date, you have to wonder if it is not time for the State to reverse out of this experiment.
Announced in the bleak days of two years ago, the idea seemed sound enough. It also had the X-factor of being imported from across the Atlantic.
The basic premise was that the banks were broken and likely to remain so for a while – which has proven the case, with nobody other than their advertising agencies believing they are lending to business.
The solution – or partial solution – was to take what money was left in the national coffers to seed a number of funds that would lend to business and generate economic growth.
The funds would be run in partnership with US and UK vulture funds and specialist non-bank lenders. There were some obvious flaws. Not least the contradiction inherent in the Government setting up funds to compete with a banking system in which it was the dominant player by dint of direct ownership of two banks and a significant stake in another.
There was also concern about rapacious hedge funds being let loose on Irish small business. This was stoked by the simplistic assumption that the funds would be seeking the sort of double-digit returns from their Irish lending that are the norm for the industry.
This was something of a red herring in that the show-stopping returns trumpeted by such funds refer to the return on equity put in by investors which is then leveraged with debt before being invested via various funds. That said, the funds in question exist only to make money and taking risks to revive the Irish economy is not part of any promise made by them to investors.
When you bear this in mind, it is no real surprise that so little has been achieved. The Oireachtas joint committee on jobs, enterprise and innovation was told that €375 million has been invested across the three funds run by Carlyle Cardinal, Better Capital and Blue Bay.
Trivial impa ct
It is a substantial amount of money in its own right, but when it comes to having an impact on the Irish economy it is trivial; a case of too little and too late.
The initiative is clearly failing in its supposed primary purpose of pump-priming the flow of non-bank finance to business. Instead the State is an investor in a number of hedge funds which are slowly picking off prime targets as the existing banks deleverage and IRBC is wound up. They are making the sort of investments they would have made anyway; a point proven by the number of non-Irish government hedge funds actively competing with them to buy assets in Ireland.
The question that now needs to be asked is whether or not the ISIF should follow through with the rest of the programme?
The answer, for a couple of reasons, is probably no. The first is that the failure of the funds to make an impact shows they are not fit for purpose. They do not understand Irish business and Irish business does not understand them.
What Irish business does understand is bank-based financing and State-backed credit institutions. The commercial banks have not served business well recently but the model that has worked here in the past is narrowly focused institutions such as the Industrial Credit Corporation and Agricultural Credit Corporation – and perhaps their time has come again.
Two years ago, when the non-banks finance initiative was conceived, setting up new State-backed business banks seemed counter-intuitive. The State itself was bankrupt and owned several bankrupt banks already, so how could it back a new bank?
But two things happened in the interim that make the case for a dedicated business bank. Several efforts were made to channel cheap money from EU institutions into business, via the pillar banks, but the money seems to get lost in the baffling business lending figures produced by the banks with no tangible gains. There is €100 million available from Germany's state-owned credit bank Kfw that cannot find a clear channel to Irish business. An Irish counterpart would provide it.
But the big change is that Ireland is not bankrupt anymore and is borrowing at rates which imply that a State-backed lender could raise funds to channel into the economy. Time for a rethink.
