Korea public officials’ fund picks $40 mn cat bond managers

Three private equity firms – LGT Capital Management, Leadenhall Capital Partners and Nephila Capital – have been chosen as the preferred managers of the Public Officials Benefit Association’s (POBA) first investment in catastrophe bonds for a total of $40 million, according to a POBA source on Oct. 14.

POBA, which manages over $7 billion of retirement savings money for South Korea’s public officials, had issued the request for proposal in September for catastrophe bonds, or cat bonds, and attracted 20 foreign bidders. It will also be the first South Korean institution to buy cat bonds.

The three investment firms were selected after two rounds of screening process. After a due diligence review on those management companies, POBA will entrust $10 million to $15 million to each of them, unless they have disqualifications.

Cat bonds are issued to cover insurers’ claims when disasters such as typhoon and earthquake occur. Because of the low possibility of a big disaster occurrence and strict payout conditions, even if such a risk materialized, cat bonds are known to guarantee a certain level of stable returns.

“We have selected companies which fit with our commitment timetable and have strong track records among major foreign management firms,” a POBA source told the Korea Economic Daily.

Globally, there were $72 billon of cat bonds and similar investments outstanding, according to a report from the Wall Street Journal in August. It added that over the past decade, yields on cat bonds have outpaced junk-rated bonds, as well as high-quality securities.

By Donghun Lee and Daehun Kim

Leedh@hankyung.com