[Interview] NongHyup Life eyes hedge fund, private equity secondary investments

NongHyup Life Insurance Co. Ltd., a unit of South Korea’s agricultural cooperative, will commit an additional 700 billion won ($620 mn) to overseas alternative assets in 2017, which may include its first investment in hedge funds and private equity secondary markets, said its chief investment officer.



The insurance firm, with assets of 65 trillion won, began overseas alternative investments last year with 720 billion won. This year it expects to allocate up to 30 billion won to 20 to 30 alternative investments apiece, diversifying beyond real estate and infrastructure.

“We will increase the proportion of overseas alternative investments of assets by 1% point every year,” Hee-seok Kim, the CIO of NongHyup Life, told the Korea Economic Daily in a recent interview. “We are looking to invest in hedge funds and private equity secondary markets… Among hedge funds, we will invest in liquid funds with the shortest lock-up period.”

If the company invests in an offshore hedge fund, it will be likely to become the first domestic life insurer to do so. But NongHyup Life has yet to decide on whether it will invest in funds of funds, or directly in hedge funds, said Kim, the former head of the National Pension Service’s (NPS) global alternative and investment strategy divisions.

NongHyup Life also sets its eyes on combined cycle power plants in the US, as an alternative to US real estate investment, as well as Japan’s niche markets including solar energy projects, while cautious about real estate investments in both Europe and the US due to higher interest rates.

Kim is in charge of asset management for NongHyup Life and NongHyup Property & Casualty Insurance Co. Ltd. Assets at the life insurer is expected to grow by 5 trillion won to 70 trillion won by the end of this year, he added.

During a stint at the NPS between 2004 and 2011, he had spearheaded the investments in HSBC headquarter building and Gatwick Airport in London. Before taking office as NongHyup Life’s CIO in January 2015, he also had led the investment division of Hanwha Life Insurance Co. Ltd.

Following are Q&As with Kim.

Q: On asset allocation plan for this year

A: We will raise exposure to overseas bonds and overseas alternative investments as interest rates are trending higher. We will maintain the proportions of domestic bonds and overseas stocks. We will increase that of domestic stocks slightly, while scaling back real estate loans.

Q: On overseas asset portfolio composition

A: Fixed-income investments make up most of overseas assets which represent 20% of our total assets. In value, they are about 15 trillion won. They consist of US government and corporate bonds, Korean paper issued by domestic companies, bonds issued by China’s state-owned companies and European financial services companies.

Now that we have raised our understanding about overseas products and their countries, we will diversify further into hedge funds and secondary private equity funds.

Q: Is the US still a top destination for overseas investment?

A: The US will remain the axis of global growth. For global institutional investors, the US cannot help but remain the top destination for overseas investment. That’s why infrastructure closely linked to the US economy, in particular, the power market, looks attractive.

Q: Other than power plants which asset class are you interested in?

A: We are looking to invest in hedge funds and private equity secondary markets.

Q: How much would you allocate to hedge funds, when you invest in them?

A: We will begin with tens of millions of dollars.

Q: Would you like to invest in funds of funds, or directly in hedge funds?

A: We have not decided yet. When I joined NongHyup Life in January 2015, the company had been preparing to invest in hedge funds since December 2014. But I told them to stop it for the moment. I thought we needed to build more consensus from within our organization and build experience focusing on fixed-income assets for the time being.

Q: On the advantage of investing in hedge funds?

A: If we buy long-term overseas bonds, we will face valuation losses in the current upward cycle of interest rates. That’s why we need to deploy capital to high-yielding alternative investments for the short term. We have concluded that hedge funds are high yield-seeking products with a short investment period and with high liquidity.

Among hedge funds, we will invest in liquid funds with the shortest lock-up period.

Q: But top-tier funds producing high returns tend to have a long lock-up period.

A: If we invest in funds of funds, that problem will be solved. Given that hedge funds charge high management fees and we have never invested in hedge funds, we are still undecided (on whether to invest directly in hedge funds or funds of funds).

Q: On the size of overseas alternative investment

A: It represents 1% (of total assets), currently. We began the investment with 720 billion won last year. We will increase the proportion of overseas alternative investment by 1% point every year. The alternative investment division, set up last year, has just five staff.

In comparison, domestic alternative investments account for 8 to 9% at 5 trillion won.

Q: On the plan to increase overseas alternative investment

A: We will deploy an additional 700 billion won or so to total about 1.5 trillion won. Assuming that each of five staff in our overseas alternative investment division invest as much as 30 billion won in a single case, we need to invest in more than 20 cases. We are looking at a variety (of alternative assets), including real estate, hedge funds and infrastructure assets. So, we think we will be able to reach the target.

Q: In our survey conducted ahead of the ASK 2016 Summit – Real Estate & Infrastructure, you named SOC projects as an attractive alternative asset class.

A: From the perspective of insurance companies, infrastructure is the easiest asset class to invest in. The risk coefficients for domestic infrastructure assets are low. Conversely, their rates of return are greater than bonds, so they would be a good investment target. (Note: Insurance firms apply 6% and 12% risk coefficients for debt and equity investments, respectively. But the coefficients for domestic infrastructure are half of them.)

Q: On offshore infrastructure

A: With regard to the US real estate market which domestic institutions had rushed to last year, we will either maintain our exposure, or lower it because of interest rate rises. US combined cycle power plants are a good alternative to real estate investment. Within the power-generation market, the alternative market to the existing nuclear power plants and coal power plants are just beginning to open.

Given that the US power market is run by private capital, we need to check how accurate power demand and supply forecasts are and how reliable the developer is.

Q: On 30-year US Treasury

A: It is desirable to buy them for two reasons. Yield spreads between South Korean and US (bond) widen further for longer maturities. That is, it is advantageous to buy long-term US bonds considering the rate of return. Second, US treasuries are the most liquid assets.

Q: On US investment

A: The US is the brightest spot of the global economy. There is almost no possibility for its economy to taking a quick turn for the worse. It is the best place to invest for insurance companies. But because (US) stock prices have soared sharply, they are highly likely to undergo a correction. The reason we cannot increase our overseas stock investment from the current 150 billion won is that the US accounts for over 40% of our overseas stock portfolio.

Q: On Europe investment by domestic institutional investors

A: Their exposure to European real estate is likely to remain at the current level, or fall. Cross-currency swap premiums are highly vulnerable to the direction of interest rates. That is, overseas real estate investment has high volatility.

With elections in Europe looming, Europe’s political instability will not be resolved anytime soon. As an investor, we need to take a wait and see attitude (toward Europe). We are looking at Japan as the next destination (of investment).

Q: What would be attractive investment targets in Japan?

A: The (Japanese) government is making policy efforts to boost solar energy, which I expect will provide investment opportunities (for domestic institutions). Given that real estate and stock markets have soared as high as they could, and bond yields are too low for insurance companies to invest, we are looking at niche markets such as solar energy.

Q: On the expected rate of return on Japan’s solar energy investment

A: It is 5 to 6% a year. There would be a transaction (relating to Japan’s solar energy) which investment firms are now examining and seeking to arrange.

By Daehun Kim and Chang Jae Yoo

daepun@hankyung.com