[ASK 2017 SUMMIT Panel Talks] Korean LPs eye PPP and greenfield infrastructure

South Korean retirement funds and insurance firms will look to public private partnership (PPP) infrastructure projects in the UK and other developed countries in search of low-risk, long-term assets, and also chase greenfield projects for higher yields.

Facing intense competition and lower returns, Korean Teachers’ Credit Union and Military Mutual Aid Association are seeking to diversify into Australia, Brazil, Spain and Italy, as well as Asia as they aim to increase exposure to global infrastructure assets next year.

By comparison, Hyundai Marine & Fire Insurance Co. Ltd. and Lotte Insurance Co. Ltd. concentrate on developed countries because of low risk coefficients applied to infrastructure assets in double A-rated countries, which will help lower risk-based capital (RBC) requirements.

For types of infrastructure debt, Hyundai remains focused on senior tranches in consideration of the RBC regulations, whereas Lotte is looking for mezzanine facilities for better yields.

The following are remarks from their senior investment managers during a panel discussion of the ASK Real Estate & Infrastructure Summit in Seoul on Oct. 25.

▶Korean Teachers’ Credit Union (Hyun Gon Kim, senior manager):

“Infrastructure accounts for 10% of our alternative assets. The proportion of infrastructure was lowered because it was difficult to find infrastructure investment opportunities. Next year, we will invest aggressively directly and through funds, too.”

“For large-size deals, we invest through blind funds. Also, we would like to invest in small but specialized funds and co-invest with them on a steady basis.”

“We will invest heavily in PPP projects. For higher yields, we will continue to look at greenfield projects. For regulated assets, the biggest concern is falling returns.”

“Overseas, we are taking a close look at infrastructure in the UK and Australia. In the US, we are highly interested in aging commercial properties. We are also interested in Brazil’s infrastructure market which a throng of investors have pulled out of.

▶Military Mutual Aid Association (Ki Pum Kim, team manager):

“We will continue to increase the proportion of infrastructure which is not high enough.”

“Even if prices go higher, we like those creating future demand.”

“By region, UK will be in favor. But because of lower returns, we also have to look at other countries with a short infrastructure history such as Spain, Italy, and Asia.”

“It would be better to make equity investment in a safe asset using high leverage, rather than investing in debt of an unsafe asset. We have to look at greenfield investment, too.”

“We are participating in bidding directly to save fees. Because we make conservative management, we take more time relatively in the procedures of selecting an investment target, analyzing the risk and deploying capital. Because of our such internal systems, we ask GPs for patience with us.”

▶Hyundai Marine & Fire Insurance (Kyung Cheol Jeon, general manager):

“Government-led PPP projects will get a push as they are trying to ease burden on public finance. (Investing in) PPP infrastructure in double A-rated countries will reduce RBC requirements.”

“We expect to see active participation in senior tranches of PPP projects and (infrastructure) in developed countries.”

“We have invested primarily in senior loans. We began making senior loans to greenfield projects. Next year, we will invest more than we did this year in infrastructure.”

“Because of tight RBC regulations, we are considering increasing investment in senior debt of infrastructure because they have low risks relatively.”

“To secure good deals on a steady basis, we have to maintain relationships with capable GPs and to do so, we need to invest in blind funds for some portion.”

▶Lotte Insurance (Janghwan Lee, alternative investment team head):

“Infrastructure makes up about 40% of alternative assets, of which global portfolio is 60%.”

“The introduction of IFRS 17 in 2021 will increase our liabilities. To extend asset durations, we have to invest in long-term debt, or infrastructure. But considering RBC requirements, we have to invest in risk-hedging assets. PPPs in double A-rated countries will be risk-hedging assets.”

“A number of US gas power plant deals have been introduced recently. Now we are closely watching new and renewable energy facilities and LNG terminals. We will focus on infrastructure in developed countries such as the US and UK because they have well-established systems and regulations and thus low investment risk.”

“We will continue to invest in debt tranches. Because of low interest rates, we will look for mezzanine.”

“We had tried to source three global deals directly, but it didn’t work out. It was difficult to match timelines and find co-investors who share our risk and return targets in such a short period of time. The lessons we learned are that we have to build networks and find a partner who can proceed with a club deal.”

By Ikhwan Kim

lovepan@hankyung.com