DM Korea Alternative Investment Outlook

South Korea Alternative Investment Outlook: Q3 2019 ‘Public Funds Plan Allocations to Overseas Alternative Investments’

Sharing Insights and Trends from South Korea’s Financial Services Industry. As we continue to expand our clientele throughout South Korea, the DM Korea Team will share a quarterly market outlook report, highlighting insights directly from South Korea’s alternative investment sector.  Q3 2019: South Korea’s Public Funds Plan Overseas Alternative Investments. South Korea’s public pension funds including presented plans for overseas alternative investments. They have liquidity to invest in overseas alternative products. Regarding this, we will briefly discuss the top Korean public funds of 2019 and their strategies.


NPS - South Korea

1.The National Pension Service (NPS) 

NPS has decided to expand its alternative investments portfolio, allocating more into the likes of real estate and infrastructure, to improve their full year performance. To do this, they are putting a lot of effort into selecting the best fund managers for the organization. Additionally, according to 2019 Committee of Operation of Fund held on 3 May, NPS is expected to shorten the investment decision process from the current 8 week process to a 4 week process.  In regard to hedge funds, NPS is now officially allowed to invest in a single hedge fund so that it can build its own portfolio and select a fund house.  NPS also claimed that “it will sustain diversification basis for foreign and alternative investment in order to improve national fund’s profitability and stability.” Out of US $700 bn AUM, 15% is forecasted to be allocated to alternatives by 2024 vs. 12% in 2018.


DarcMatter - DM Korea AI Outlook Q3 2019

2.Korea Teachers’ Credit Union (KTCU) 

According to statement of account, the rate of return for the last year was around 4.1% per year and US $868 mm. Despite the fact that the stock market had fallen, KTCU saw benefits from diversifying the portfolio into real estate, infrastructure, and private equity funds. Indeed, the ratio for Alternatives and corporate finance have increased from 40% to 56.6% from 2014 to 2018. AUM (Asset Under Management) has increased by US $994 mm to US $22 bn, which maintains the No.1 spot among mutual aid associations. KTCU has presented its target rate of return for the year of 4.7%, and AUM to be US $24 bn, which has increased US $2.2 bn compared to last year. Not only will this augment the ratio of foreign investment (foreign:domestic investment will be 56.4%:43.6%), but it will also thoroughly examine the investments in foreign real estate and PPP (Private – Public Cooperative Planning infrastructure investment). Reflected by asset type, stocks represent 17% of portfolio, bonds represent 23.8%, corporate finance 17.6%, and AI 37.1%. Lastly, on the last half of this year, the institution will buy low when the stock market becomes bearish as OECD composite leading indicators are expected to increase with quantitative easing policy to be implemented soon.


DM Korea AI Outlook Q3 2019

3.Korea Post

Korea Post started to invest in mezzanine tranches on commercial properties for the sake of portfolio diversification. According to IB, Korea Post plans to invest US $300 mm in mezzanine loans. For this, Korea Post will select about two asset fund houses separately managed accounts, investing US $150 mm, respectively. Korea Post said that “We have processed with senior loans and equity parts from foreign real estate. We are to include mezzanine loan strategy for portfolio diversification.” Korea Post has invested around US $450 mm in commercial real estate mezzanine loans in 2016. At that time, the organization invested in countries such as the US, excluding high risk loans such as development businesses. Last year, it has invested €100 mm in foreign real estate equity investments, which is based on value-added strategy with the European region as the target. ‘Value-added’ is a strategy that earns extra profit by raising real estate’s value with tenant change and remodeling of the building.


DM Korea AI Outlook Q3 2019

4.Public Officials Benefit Association (POBA) 

POBA plans to commit US $250 mm to Private Debt Funds focusing on micro-cap companies in North American and Asia. According to IB source, on POBA will accept North America and Asia Pacific Private Debt Fund proposal and will select 4 US-focused debt funds and one Asia-focused fund. Total investment amount is US $250 mm, with minimum commitments of US $50 mm. Presentations will be done in October and the funds will be selected a month later. Average IRR for this is around 5-6%. Indeed, POBA has invested €100 mm through European private debt funds at Parksquare in 2017. In 2018, it invested €70 mm in Ares Capital’s Europe fund, the 4th made by Ares Capital. In the first half of the year, it has selected GPs for the AMCs for European private debt funds, allocating €40 mm to each company. The reason for POBA’s foreign private debt fund investments are most likely the attractive high dividend while financial market’s volatility increases.

DM Korea AI Outlook Q3 2019

5.Government Employees Pension Service (GEPS) 

GEPS will select a global investment manager to invest US $83.3 mm in overseas Fund of Funds (FOF). Last year, US $83.3 mm was invested in FOFs, which GEPS led to a total of US $ 166.6mn for FOFs over the two year time frame. According to the financial industry, GEPS announced that they will receive proposals to select FOF investment management firms. The investment is expected to be made by the send of this year. Last year, GEPS invested US $83.3 mm to overseas FOFs and will invest a similar amount this year. GEPS noted “We are looking closely at overseas FOFs to give us an opportunity to invest in new funds to which we cannot commit because of difficulty with matching their terms and conditions. We haven’t set a quota for them, but we are making a list of them to invest when an opportunity comes.”

-Exchange rate: KRW1198.60/ $ (2019-09-26)