NPS faces calls for GP screening system revision, ahead of $600 mn mandate awards

The National Pension Service (NPS) of South Korea has drawn only five bidders for its planned 500 billion won ($426 million) commitments to be made to two domestic large-cap private equity firms, amid doubts over the efficiency of its decade-old evaluation system of external managers.

The bidders, excluding one disqualified fund, will make presentations on June 28 to the world’s third-largest pension fund in a so-called “beauty contest”, along with four local mid-cap PEFs which are in the race for another 200 billion won ($170 million) mandates from the NPS. It is not known publicly how many bidders had participated in the bidding for NPS’ mandates in the previous years.

Fund industry watchers call for a broad-based overhaul of the NPS’s PEF screening systems to better reflect the asset growth and improved expertise of domestic PEFs. The screening systems were introduced about 10 years ago when South Korea approved of the establishment of home-grown PEFs.

In particular, they argue that because of too much focus on fairness and transparency in the evaluation process, the NPS may not be able to choose qualified PEFs.

A source who had served as a senior manager of the NPS’ fund management division said that under the pension fund’s evaluation system, bidders for hundreds-of-billion-won mandates are screened after a mere 30-minute interview by committee members mostly from the private sector. Those members have no management experience, nor take responsibility for the results.

“The system puts too much priority on fairness and transparency. They need to find ways of allowing individual managers to have more autonomy,” the source added.

A South Korean PEF head, who failed in winning a PEF mandate from NPS last year, said that he had stayed up late preparing a presentation to the NPS for a few days. But he ended up with a heavy flu and delivered a poor presentation in a hoarse voice. The PEF was tipped as a strong candidate for the NPS’ domestic PEF mandates last year, because of its company reputation and track records.

“I feel responsible for it, because I failed to manage my body conditions properly. But I cannot throw away the thought that the NPS’ external manager selection system also has a hole.”

Another criticism over the NPS’ so-called beauty contest, which is unique for South Korean pension funds, is that it is a supplier-focused system, at a time when abundant free money finds no place to go because of low interest yields

For the selection of foreign PEF managers, however, the NPS follows global practices: receiving proposals from individual investment funds that are in the process of a fund-raising, reviewing them and making an investment decision.

By comparison, a source of the Korean Teachers’ Credit Union said: “We are considering expanding commitments on a frequent basis, at the point of time when talented management firms raise a fund.”

SELECTION PROCESS LIKE “OPERATION 007”

NPS, with $440 billion won under management, allocates about 1 trillion won to domestic PEFs a year, which is the largest amount of PEF investments by a South Korean limited partner.

In 2016, it will allot 250 billion won to two domestic large-cap PEFs, respectively and an additional 100 billion won to each of two mid-cap local PEFs.

An NPS source said a total of five PEFs had applied for the large-cap mandates, and one of them was disqualified. According to industry sources, Keistone Partners, SkyLake Investment, VIG Partners and China’s IDG Capital Partners are the bidders of large-cap mandates.

Bidders will be reviewed based on their documents and interviews. NPS’ working-level officials are in charge of document evaluation. Interviews are held by the external manager selection committee consisting of four unidentified private-sector members (professors, former or current private asset manager executives, et al.) and three NPS officials. To avoid information leakage, the committee members are picked two days ahead of interviews, which a private-sector committee member describes as “Operation 007”.

PEF managers subject to the NPS’ evaluation are given 10 minutes for a presentation and 20 minutes for Q&As. “They cut us off, if we go beyond 10 minutes. It seems like they are trying to be as fair as possible to all management firms,” said a South Korean PEF chief executive.

Officials of the NPS’ alternative investment division refrain from meetings, telephone conversation and lunch/dinner appointments with outsiders from a month before the evaluation process starts. The head of the NPS’s alternative investment division is excluded from the external manager screening process, while PEFs subject to the evaluation sign confidentiality agreements.

“After failed management companies sent anonymous letters and produced rumors, we started to put top priority on fairness and transparency as our evaluation principle,” the NPS source said.

STRONG CANDIATES?

Considering track records and presentation skills, SkyLake and VIG are speculated as the most likely winners for the NPS’ large-cap PEF mandates this year.

SkyLake is led by former Samsung Electronics’ Digital Media President, Daeje Chin. VIG Partners’ head, Byung Moo Park, was a star M&A lawyer of South Korea’s largest law firm Kim & Chang. Park is also an eloquent speaker.

However, IDG Capital’s participation in the race makes it difficult to predict the outcome, given the China-based fund’s track records with China’s top IT companies. Once it opens a local unit and registers with the South Korean regulators, IDG Capital will be qualified as a domestic fund house. Keistone, headed by an accountant from a top South Korean accounting firm, is seen as a “dark horse” in the race because of its recent rapid growth.

For mid-cap mandates worth a combined 200 billion won, Lindeman Asia Investment, Mirae Asset Venture, LB Investment and SG Private Equity were reportedly on the shortlist.

 

By Dongwook Jwa

leftking@hankyung.com