Digital assets emerge as Korean LPs' No. 1 infrastructure target

Digital infrastructure, such as data centers, towers and smart meters, will be the hottest infrastructure asset this year for South Korean limited partners, according to a recent survey. Renewables, which topped Korean investors' favorite sector from 2022 to 2023, ranked second due to a decline in profitability in the high interest rate environment.

Infrastructure, alongside private debt, remains the asset class that Korean LPs plan to expand the most, the survey showed.

The Korea Economic Daily conducted the survey in December 2023. A total of 15 institutional investors – five pension funds, three mutual aid associations and seven insurers, responded with their asset allocation plans, general partners selection standards and market outlook.

The 15 institutions are estimated to manage more than 2.12 quadrillion won ($1.59 trillion) in assets as of the end of 2023, with 20.7% for alternative investments. Overseas assets make up about 65% of their alternative investments.


Alongside private debt, infrastructure is the asset class that Korean LPs plan to increase the most. Six of the 15 surveyed LPs will expand exposure to the inflation-linked asset class this year. Some 40% of those polled see infrastructure fairly valued today, while 33.3% believe it is overpriced.

Some 40% of the surveyed institutions will increase their exposure to infrastructure, while 26.7% will maintain the current exposure. The others are yet to decide their plan or didn’t respond.
The survey modified the categories of infrastructure sector this time, setting digital infrastructure as a single option and combining social infrastructure with private and public partnership (PPP). As a result, digital assets emerged as the most favored infrastructure sector by Korean LPs, beating renewable energy which topped over the past two years. 

“Digital infrastructure is emerging as a new, fast-growing sector with abundant opportunities. Renewable energy, which was among the hottest infrastructure in recent years, has experienced falling profitability due to high interest rates,” said an infrastructure investment expert at an insurance major, who requested anonymity.


Similar to the poll conducted last year, core plus topped the surveyed LPs’ infrastructure strategy with 46.7% support. Value-add ranked second with 20%, down from 40.9% a year ago. Opportunistic, which has higher risks than other strategies, remains the least popular one among Korean LPs.

“Many Korean LPs might have chosen core plus as a strategy between core and value-add – it is difficult to bet big on core, which seeks stable income from prime assets, due to high rates; and value-add strategy seems to have peaked,” the infrastructure expert said.


Secondaries topped the infrastructure investment tranche for Korean LPs for two straight years. Some 40% of the surveyed institutions will expand the tranche for mature assets with possibly faster exits, according to the poll. Debt and mezzanine ranked second with 26.7%, down from 36.4% a year ago.



By region, Europe was picked as Korean LPs’ best destination for infrastructure investments. Some 40% said they will expand exposure to European infrastructure assets, compared with 26.7% to North America.

In the poll conducted last year, Europe and North America scored 45.5% and 50%, respectively.

“Many investors prefer European infrastructure, including renewables, as the contracts are relatively stable and ensured by regulations. Compared with that, the infrastructure in North America is more based on free market competition and has relatively a high reliance on the energy sector,” the infrastructure expert explained.

Korean LPs are keen to invest in brownfield, a developed asset with existing production facilities, rather than greenfield, in which investors have to build from scratch. Some 33.3% will expand their investments in brownfield, compared with 13.3% for secondary stage and 6.7% for greenfield.

About 20% of the polled institutions plan to newly invest in four or more infrastructure funds this year, compared with 26.7% to bet on two funds. The remaining haven’t confirmed their plan yet or didn’t respond to the question on the funds.

To view the detailed responses of each institution on their alternative asset allocation and fund manager selection, please see the Asset Owners Report.

The 15 surveyed institutions are as follows:

Public pensions and SWF

National Pension Service
Korea Investment Corporation
Government Employees Pension Service
Teachers' Pension
Korea Post (savings)

Mutual aid associations

Military Mutual Aid Association
Korean Federation of Community Credit Cooperatives
The Korean Teachers' Credit Union

Insurers

Kyobo Life Insurance
Samsung Life Insurance
Samsung Fire & Marine Insurance
Shinhan Life Insurance
Hanwha Life
ABL Life Insurance
KB Insurance

Write to Jihyun Kim at snowy@hankyung.com

Jennifer Nicholson-Breen edited this article.