Balancing Risk With Reward
Investment funds are categorised as belonging to the non-bank financial intermediaries sector (NBFI), and the investment fund component has grown significantly since the global financial crisis. It is estimated that the global NBFI sector grew from €72 trillion in 2008 to €212 trillion in 2021, and within that the global funds sector grew from €15trn to €72trn.
According to the Central Bank of Ireland (CBI), the NBFI sector now represents about half of all global financial assets, and in Ireland the sector has expanded significantly too, driven by the growth in the funds sector. Total assets of the NBFI sector in Ireland were €6.3trn in 2021, from €1.5trn in 2008, and investment funds accounted for around 80% of that growth.
Ireland is one of the world’s largest hubs for investment funds at a global level, and hosts the largest Money Market Funds sector in Europe, with assets totalling over €700bn. Ireland is also host to the largest ETF sector in Europe, with total assets of over €900bn, or about two-thirds of the total assets of ETFs in the euro area.
The latest data from trade body Funds Ireland counts c.17,000 people employed in Ireland in funds activities, with 14,500 funds registered here. The fantastic success of the funds sector in Ireland has occurred despite absence of regulation, or perhaps because of that light touch.
Now though the Central Bank has decided to change that, arguing
that “systemic risk” in the sector needs to be addressed. The regulator recently issued a Discussion Paper inviting feedback from market participants, with a view to informing CBI’s contribution to international regulatory discussions.
The only basis for the CBI’s concern would seem to be that as the funds sector grows in size, so does its systemic importance. Systemic risk is disruption to the provision of financial services caused by an impairment of parts of the financial system with serious negative consequences for the real economy. “Like all forms of financial intermediation, the activities of investment funds can pose risks that, in certain circumstances, can become systemically relevant,” is the Central Bank’s opinion.
However, mitigating risk has a commercial and economic cost, and that cost should not outweigh the benefit. As the CBI paper outlines, financial intermediation via the funds sector diversifies the financing channels available to the real economy and enables diversification of asset portfolios, with benefits for investors. The funds sector supports broader economic activity and acts as a useful alternative to bank financing. In fact these economic benefits are reflected in the EU’s Capital Markets Union policy agenda.
The share of debt financing of non-financial corporates in the EU by NBFIs has almost doubled over the past decade. Around half of Irish funds’ investments provide financing to other financial institutions, and Irish-resident funds also intermediate funding to the global economy, with half their assets made up of equities and corporate and government debt.
The Irish funds sector’s linkages to the domestic real economy are small relative to the size of the sector. Irish funds hold one-third of the investable Irish commercial real estate market, and when this tiny sector of the Irish funds universe came under pressure a year ago, the Central Bank was able to implement a package of macroprudential measures.
So long as it can clean up its own house, why should the CBI worry about the rest of the world?
Growth in Ireland’s domestic economy in 2024 is forecast to be on a par with the 2023 outcome, according to official predictions. However, no such optimism surrounds the commercial property sector. Despite trading pressures, insolvencies are tracking lower than the pre-Covid norm. As Wyeth is set to exit making infant formula in Limerick in the coming years, Pepsi is doubling down in Cork.
GROWTH FORECAST
The Central Bank has revised downward its growth forecast for the Irish economy. Modified Domestic Demand is now forecast to grow by 2.9% this year and by 2.6% in 2024. The Central Bank’s expectation is that the path back to sustainable rates of inflation is likely to be gradual and uneven.
COMMERCIAL PROPERTY
CBRE counted €440m invested into Irish commercial property in Q3 2023, spread across 30 transactions. The long-term quarterly average is c.€1.1bn. The largest Q3 transaction was the €80m sale of George’s Quay House in D2 to French asset manager Corum Asset Management.
INSOLVENCY TREND
Company insolvencies are running 33% higher than last year, with PwC tallying 468 insolvencies for the nine months to September 2023. PwC estimates total insolvencies for the year will be in the region of 650, compared with 539 for 2022. Such an outcome would be below the pre-Covid norm.
EXL BASE
EXL, a specialist in data analytics and digital operations and solutions, is establishing a base for its international business in Dublin. The company said it intends to hire up to 200 AI and data engineers and other technology positions over the next three years.
DELOITTE REVENUE
Deloitte Ireland has reported revenue of €479m for the 12 months to May 2023, an increase of 12% year-on-year as demand for the company’s services was driven by firms
requiring assistance with digitalisation and sustainability. Nearly three-quarters of turnover in FY23 was derived from non-audit services, the firm stated.
WYETH WIND-DOWN
Nestlé plans to cease operations at its Wyeth Nutrition factory in Askeaton, Co. Limerick, by Q1 2026. The company is also planning to close the co-located R&D centre by Q1 2025. The company said that c.540 employees face redundancy, due to a decline in demand for infant formula milk in China.
SME LENDER
Santiago Capital, a niche lender for housing development, has branched into business loans through sister company Santiago SME Finance.
Santiago says it can provide finance of €10,000 to €500,000, in the form of merchant advance loans or term loans.
UKRAINE CREDIT
Capitalflow has become an on-lender for the SBCI Ukraine Credit Guarantee Scheme. The equipment lease and HP finance specialist is offering loan terms of up to six years under the scheme at discounted interest rates. Capitalflow said it has €75m to lend from the scheme resources.
MORE PEPSI
PepsiCo Ireland has announced a €39m expansion of its manufacturing facilities at its site in Little Island,
Co. Cork. This follows the completion of a €127m investment in the same site and the adjacent R&D facilities earlier this year.
D4 SPACES
IWG is opening a flexible workspace in Donnybrook House, D4, in January 2024. The new Spaces location will provide 215 desks across 70 private offices, meeting rooms, call booths, co-working and creative spaces, as well as a business café.
M&A DEALS
IT reseller DataSolutions has been acquired by Nasdaq-listed Climb Global Solutions. Data Solutions, led by Michael O’Hara, sells hybrid multi-cloud, cyber security, digital workspace and networking products, and had turnover of €126m for the year to March 2023, up from €98m the previous year.
Galway marketing services agency IMS Marketing has been acquired by Locomotive Agency, based in North Carolina. Established in Oranmore in 2007, IMS Marketing is a B2B strategic marketing specialist providing export-focused businesses with market entry strategies.
Packaging company NPP has acquired Blanchardstown peer Wraptite Packaging, subject to CCPC approval. Wraptite is Ireland’s largest independent manufacturer of pre-stretch film and mini reels.
Xeinadin Group has added to its portfolio of accountancy firms in Ireland with the acquisition of Quintas. Based in Cork City, Quintas was established in 2005 and employs 70 people. The Xeinadin network in Ireland now extends to over 20 offices around the country.
Growth capital investor BGF has invested in specialist marine plant hire business Ocean Crest Marine. Based in Galway, Ocean Crest Marine operates Ireland’s largest fleet of barges used for marine construction projects.
Cheshire engineering consultancy RSK Group has increased its footprint in Ireland with the acquisition of Jennings O’Donovan. The Sligo firm has annual turnover of c.€8m and specialises in renewable energy, water supply, wastewater treatment and planning and environmental services.
Fire protection group WTech has acquired Fire in Dublin, its third takeover of the year. WTech is majority-owned by private equity firm Waterland, and is projecting €120m turnover this year.
Communications consultancy Powerscourt has been acquired by New York agency Morrow Sodali, which advises on corporate governance, ESG, IPO preparedness, shareholder activism, M&A services, and proxy solicitation.
Renatus Capital Partners has purchased a majority stake in WH Scott Group, the market leader in Ireland and the UK in the fabrication, supply, and certification of equipment used in lifting and industrial markets.
MEDPOINT FUNDING
Medpoint said it has raised c.€250k of its €500k EIIS funding target for 2023. Medpoint serves the physio and near patient diagnostics healthcare market with products in a variety of categories, and the tax-break investor capital will be used to increase sales. The company recently partnered with Orliman, a world leader in the manufacture of orthopaedic bracing and support products.
MOBIUS SPACE
Taoiseach Leo Varadkar has officially opened Grant Thornton’s new Mobius collaboration space at the accountancy firm’s base at City Quay in Dublin. The firm said it has added over 1,500 new jobs in the past two years, with 800 new hires in 2023.
DELTA RETURNS
Delta Air Lines is to restart its daily route between Shannon Airport and New York-JFK from 25 May 2024. The airline last operated on the route in 2019.
CARBON PLEDGES
The fifth annual report on the Business in the Community Ireland has found an increasing number of businesses are prioritising
Low Carbon Pledge
decarbonisation. A common trend identified in the PwC report is the challenges experienced by Pledge signatories in calculating supply chain carbon emissions.