Pension Funds Eye €2 Billion Opportunity to Boost Irish SMEs

Access to finance is crucial for businesses at all stages of growth, particularly for small and medium-sized enterprises (SMEs). In response to this need, the Irish government has committed to increasing funding through an allocation of €250 million to Enterprise Ireland’s Seed and Venture Capital Scheme. This initiative aims to stimulate growth, especially for fast-growing companies.

The Irish Venture Capital Association (IVCA) estimates that Ireland could unlock up to €2 billion in institutional capital to enhance the growth prospects of Irish SMEs and start-ups. In its pre-budget submission, the IVCA highlighted the challenges posed by increasingly isolationist US economic policies, emphasizing the need for Ireland to recalibrate its economic model. Historically, foreign direct investment has been a cornerstone of this model, but recent data reveal a concerning trend: venture capital investment in Irish SMEs plummeted from €494 million to €112.6 million in the second quarter of this year, marking the lowest level in a decade.

The IVCA is advocating for several government policies aimed at encouraging Irish institutional investors—such as pension funds, insurers, and banks—to co-invest in venture capital and growth funds. “This would reduce our over-dependence on international VC funding, which accounted for three-quarters of total venture capital investment last year,” noted Caroline Gaynor, chairwoman of the IVCA, during the submission’s launch.

Identifying the Scaling Finance Gap

A significant barrier to fostering successful global businesses in Ireland is the lack of available scaling finance. The advent of pensions auto-enrolment presents a timely opportunity to address this issue, especially since other EU countries have implemented policies that encourage pension funds to invest in venture capital. For instance, the Netherlands has established frameworks to support such investments, while France’s Tibi initiative has been promoting investments in innovative technology start-ups since 2019. In the UK, 17 major pension providers have committed to allocating at least 10 percent of their defined contribution default funds to private markets by 2030, an increase from the previous 5 percent target set in 2023.

The German government is similarly focused on mobilizing at least €100 billion in private capital through its Germany Fund, targeting SMEs and scale-ups. A report by the Department of Enterprise, Tourism and Employment, titled “Market Demand for and Supply of Scaling Finance in Ireland,” published in July, underscores the equity financing gap for Irish enterprises poised for growth. The report, prepared by SQW Economic Research Consultants, estimates this gap at around €1.1 billion over the next two to five years, particularly affecting capital-intensive sectors where product development requires long-term investment.

Katharine Byrne, head of deal advisory at BDO Ireland, highlights that while there is a decline in venture capital investment, activity in private equity remains strong. “There is quite a lot of activity at the moment, which is surprising given the level of economic turbulence and uncertainty,” she remarked. Companies are actively seeking funding for both growth and working capital to navigate potential economic challenges.

The Role of Private Equity

While traditional banks continue to support businesses, their lending criteria often exclude start-ups, focusing instead on repayment capacity based on trading profiles. This has led to increased reliance on state-backed entities like the Local Enterprise Offices, MicroFinance Ireland, and Enterprise Ireland for financing solutions. Alternative lenders are willing to provide capital based on cash flow or asset strength, filling the gap left by conventional banks.

“Private equity is investing in businesses with a compelling growth story, but which are in need of an injection of capital,” said Colm Sheehan, director at Crowe’s corporate finance department. He noted that private equity firms are now involved in both building and divesting portfolios, reflecting changing market dynamics. For many business owners, this approach offers an opportunity to secure personal wealth while investing in expansion or considering management buyouts.

The backdrop of recent economic challenges—Brexit, the COVID-19 pandemic, geopolitical tensions, and fluctuating inflation rates—has created a climate of uncertainty. Despite this, many SMEs have demonstrated resilience. Sheehan summarized the situation succinctly: “In the last 10 years, we’ve had Brexit, Trump version 1, Covid, Ukraine, inflation, interest rates, then Trump version 2. The only certain thing has been the uncertainty of it all.”

The potential for pension funds to fill the scaling finance gap offers a promising avenue for enhancing the growth prospects of Irish SMEs. As the government and industry stakeholders explore these opportunities, the path forward may redefine the landscape of venture capital investment in Ireland.