Govt pension fund eyes real estate in non-core areas

South Korea's Government Employees Pension Service (GEPS) is setting its sights on overseas office buildings not only in core regions but in its peripheral areas as the $7 billion pension fund is bulking up its overseas portfolio.

Seo Won-joo, in his third year as the pension fund's chief investment officer, said GEPS has been raising exposure to overseas assets with a focus on equities and alternatives since last year, and such investment trends will continue for some time. 

GEPS plans to further increase the proportion of overseas assets from the current 36%, led by alternatives such as infrastructure and real estate, while scaling back fixed-income assets. 

"Our overseas alternative investments have been focused on office buildings in core areas in gateway cities up to now," Seo said in an interview on Aug. 24.

"Going forward, we will expand our (real estate) targets into those on the periphery of core areas," he told Market Insight, the capital news outlet of The Korea Economic Daily.

The former CIO of PCA Life Insurance Co., currently Mirae Asset Life Insurance Co., entered his extended one-year term in May this year. Since taking office as the pension fund's CIO in May 2019, he has diversified its portfolio into venture capital and overseas private equity funds, as well as overseas infrastructure.

In May this year, GEPS' alternative investment head Ro Seung Hwan said the pension fund was looking to diversify into value-added and opportunistic deals, as well as into logistics and data centers, infrastructure and digital assets. Ro gave the remarks in a real estate panel session of the ASK Conference 2021 hosted by The Korea Economic Daily.

Last month, GEPS awarded a combined $105 million mandates to Goldman Sachs, Macquarie and Paris-based Ardian to make its first investment in overseas infrastructure.

PROPORTION OF ALTERNATIVES, OVERSEAS ASSETS

The government pension fund is now aiming to increase the proportion of alternative assets, including overseas real estate, to 31% of its medium and long-term assets by 2026 from the current 23%.

Unlike its short-term reserves tapped for pension benefits, the medium and long-term assets are put into longer-maturity assets for higher returns. The short-term reserves make up about 20% of its assets.

Last year, GEPS posted an average return of 11.4% on investments for medium and long-term assets, far above its target of 4% and in line with those for other South Korean pension and retirement funds.
 
The proportion of overseas assets has increased to 35.8% of its medium and long-term assets as of the end of July, compared with 33.3% at the end of 2020 and 27.6% at the end of 2018. 

When giving investment madates to private equity and venture capital firms, GEPS first sets its investment theme for the mandate such as biotechnology and receives applications accordingly. 

So far this year, it has deployed about 50 billion won to overseas secondary strategy private equity funds and private debt funds. It manages 8.2 trillion won ($7 billion) as of the end of last year. 

"We're also making minority equity investments in promising companies in need of capital," Seo added.

In the first half of this year, it posted a 5.6% return on average on investments, including its short-term reserves.

GEPS has 31 in-house investment managers who have remained in the investment division for five to seven years to build their expertise

Prior to heading then PCA Life Insurance's asset management, Seo had managed investments for Samsung Life Insurance Co. in its New York and Singapore units.

Write to Jae-hu Kim at hu@hankyung.com
Yeonhee Kim edited this article.