Since the go-go eighties, Ireland has been punching above its weight in cultivating a profile as a home of technological innovation.
In 2003, private equity funds invested in Ireland totalled e255m. This represented 0.194% of the country’s GDP, and one of the highest percentages in Europe, higher than Germany, Belgium and Switzerland. Of the money invested, 96% went into high-tech companies.
But in the same year, Ireland’s private equity firms raised only e60m, placing the country near the bottom of the European table, although the previous year’s tally had been e201m.
The reluctance of Irish investors to back private equity schemes is reflected in the lack of pension fund involvement. Most pension funds consider private equity (if at all) on an ad hoc basis, rather than as part of a methodical asset allocation strategy.
“There’s a lot of talk about it, but not a lot of action as yet,” says Deborah Reidy, investment consultant, Hewitt & Becketts. “We’ve gone to clients on the back of the Myners Report, which suggested ways of making private equity investment easier. But there has not been a lot of interest, which is still more towards equities and bonds. We do use the diversification argument, but some people are gunshy. They have had a torrid time in ordinary equities and feel that private equity is even racier.”
“I’d say that a typical allocation by Irish pension funds to private equity is about 0.5%,” says Tom Geraghty, senior investment consultant, Mercers. “But I don’t see the allocation going up all that much.”
According to Maurice Roche, general partner with Delta Partners, managers of three early-stage funds, the relatively bumper returns from the Irish property market have attracted attention from investors, compared with the lack of recent returns from private equity.
“Even so, we believe that within the venture capital asset class there are some investments which will make exceptional returns,” he says. “We already have clients who are pension funds, and we have noticed an upsurge in interest. But I am not sure if this will lead to an upsurge in commitments.”
Ten years ago, a government-sponsored review into venture capital suggested that Irish pension funds should allocate 0.08% per year of their assets into the Irish venture sector.
“Broadly, that happened for the first year, but it never got off the ground,” says Joseph O’Dea, senior investment consultant, Watson Wyatt. “But I do believe this state of affairs will change in the coming years.”
O’Dea points to yet another reason why Irish schemes are reluctant to stray from traditional assets.
“There is an issue of governance,” he says. “Most Irish pension schemes are fairly small, so they have not got the expertise or money to take specialist advice to select a private equity manager. The vast majority are still delegating to a simple balanced manager. And if investing in private equity is not openly encouraged, the manager may not feel it is their place to suggest it.”
Governance of a different kind is also a factor according to Jennifer Richards, investment director, Ireland, Standard Life Investments.
“Pension fund trustees do not have so much time to spend on investment issues, as they are preoccupied with pension fund and accounting regulations,” she says.
She agrees that most schemes traditionally would have had a single manager running a balanced portfolio, which would be unlikely to include private equity.
But she says: “Over the past few years, there has been a trend towards setting up their own benchmarked schemes, or splitting the mandates, both of which make it more logical to allocate a portion to private equity. There is definitely a trend towards private equity. In the next couple of years, we are looking to see some interest at the bigger end of the market.”
In this direction, it is the National Pensions Reserve Fund which is leading the way at the moment (see panel).
One drawback which the Irish private equity sector faces is the lack of suitable vehicles for investment.
In fact, the vast majority of available vehicles are in the venture capital arena. Irish buyout funds are few and far between. And it is buyout funds which have been far more popular in the rest of Europe over the past couple of years.
“Ireland only became industrialised in the 1960s, so there are few large conglomerates or big family businesses which might be buyout candidates,” says Niall Carroll, managing director, ACT Venture Capital, which is the biggest venture capital house in Ireland. “There are public companies which go private, but this is outside the scope of the Irish venture houses, so the deals have to be done by the international houses.”
ACT itself backs high-tech companies, with 75% invested in Ireland and the rest overseas, mainly in the UK.
“Everything these companies sell is exported, so the funds are not an Irish economy play, more a world economy play,” says Carroll. The ACT 2001 Fund, worth €171m, was the largest venture fund raised in Europe in 2002, half the money coming from Ireland itself.
ACT pension fund investors include Eircom, the Electricity Supply Board, RTE and AIB Group, which invest directly in ACT funds. Smaller pension clients invest through their managers’ pooled funds.
Already, ACT has seen big uplifts on exits. Last year for instance it sold a hi-tech company in Cambridge, for £29m on an investment of £8.5m.
Carroll believes the tide may be turning for private equity, particularly as Irish investors become more knowledgeable about the asset class.
“Pension funds are beginning to look at diversification issues and higher returns,” he says. “Furthermore, the liquidity of private equity funds is better than they think. With, say, a 10-year venture fund, money can start to flow back after two or three years.”

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