[ASK 2019 SUMMIT Panel Talks] Korean LPs eye 5-8% return on alternatives

Teachers’ Pension, the Public Officials Benefit Association (POBA) and the Military Mutual Aid Association (MMAA) are looking to increase global alternative investment for target returns of 5 to 8% per year with focus on co-investment, secondaries and mezzanine notes to earn steady cash flows, their investment heads said.

On general partners, Teachers’ Pension showed preference for GPs paying a frequent visit and keeping their mandate timeline.

MMAA called on foreign GPs to come with domestic strategic partners to help the $9 billion association updated with post-investment management and relevant information.

The following are key remarks by senior officials of the three retirement funds in a penal discussion during the ASK 2019 Private Debt & Private Equity Summit in Seoul on May 15.

▶ Teachers’ Pension with $16 billion in assets (Dae-yang Park, CIO):

“Our target returns are 5.5% for overseas alternatives and around 5% for domestic alternatives per year.”

“We are aiming to raise the proportion of alternative assets to 30% by the end of 2023 from 20% at the end of April.”

“For alternatives, we are aiming to raise the proportion of overseas alternatives to 17% from the current 9% (of total financial assets of $14.6 billion). We will raise the proportion of assets generating steady cash flows in consideration of the maturity structure and liquidity.”

“We refrain from primary investment, and instead use secondaries and co-investment. The same goes for real estate and infrastructure.”

“We have not hedged overseas equities and alternatives against foreign exchange risk since 2018, but selectively currency hedge for projects with fixed cash flows.”

“On GP selection, track records are not enough. We want them to keep their mandate timeline so that we can seize the return. I lean towards those who visit us frequently. I value their friendliness and sincerity. Mutual understanding is the key. I look carefully at how they had controlled losses in the prior global financial crises and retain their manpower.”

▶ Public Officials Benefit Association with $11 billion in assets (Dong-hun Jang, CIO):

“Our target return is around 5% per year.”

“We will maintain the proportion of alternatives at mid-50% and focus on private equities, infrastructure and real estate.”

“Our investment strategy is different from that of Teachers’ Pension. Because we pursue absolute returns, we lean towards the products with downside protection and generating steady cash flows with a limited risk.”

“Because real estate makes up the biggest proportion of our portfolio, we are considering raising the proportion of private equities and hedge funds in the medium to long term.”

“Of real estate assets, we have been raising debt assets at a faster pace than equity investment.”

“POBA focuses on earning cash flows through dividend incomes rather than capital gains, regardless of whether it is private equity or private debt. Our investment focus is on mezzanine, co-investment and secondary.”

“We have been investing in US commercial real estate debts for three years. They delivered attractive risk-adjusted returns. We don’t care about forex losses because we hedge 80 to 100% of them against currency risk.”

“Although we are increasing investment in lending, we worry about recovery rate of covenant-lite loans to which we have increased exposure on expectations of an economic turnaround.”

“We only make indirect investments. On top of GP’s track records, we are looking at whether their keymen continue to manage them, their long-term interests are aligned with ours and they are sincere about managing our investment. If we are confident about them, we re-up for a bigger commitment.”

▶ Military Mutual Aid Association with $9 billion in assets (Kee-sang Kwon, managing director):

“We make new investment of 800 billion won to 1 trillion won every year. Domestic and overseas account for half and half. We focus on assets generating steady cash yields and will maintain that stance going forward.”

“It seems that we now need to lower our expectations. We are looking for 7 to 8% returns per year from overseas investment based on our direct investment.”

“Alternative assets are 2.4 trillion won, accounting for 20% of our total assets. Because we need to distribute stable returns, we focus on real asset investment. We will continue to invest in medium-risk medium-return assets.”

“To overseas PEFs, MMAA has little exposure because of difficulty in meeting their funding timeline and our internal process of bringing them up together for discussion.”

“Now PEF is getting bigger in size, we need to invest in them. As the first step, we are considering committing to global and big PEFs. We are looking at general managers specializing in fourth industries and IT-specialized PEFs.”

“For VC funds, we are considering investing in them after selecting general managers in the second half of this year.”

“In addition to introducing good products, I want GPs to come with capable domestic strategic partners. After making investment, if we have limited access to information relevant to the investment, we as an investor feel uncomfortable because our investment period is seven to eight years, or over 10 years.”

By Hyunil Lee

hiuneal@hankyung.com