[ASK 2018 SUMMIT Panel Talks] Korean LPs see riskier private debt investment

Major South Korean institutional investors plan to raise exposure further to credit investments in search of steady cashflows and expect to see more investment opportunities for riskier debts, bracing for higher interest rates and a possible economic downturn.

Competition is likely to deepen for private debt deals from newly-launched debt funds and following the relaxed rules over the US CLO market, said their senior officials.

The following are remarks from key officials of major South Korean asset owners in panel discussions during the ASK 2018 Private Equity & Debt Summit in Seoul on May 29.

▶Government Employees Pension Service (Woncheol Suh, head of private market investment division):

“We expect to see continuously investment opportunities for senior corporate loans and opportunistic investments with a rise in marginal companies. We will continue to expand investment (in private debts).”

“We are subdividing private debt investment by region, strategy and investment segment. Because of their low cashflow volatility and good cashflows in early-stage investment, private debt funds fit with GEPS’ liability structure.

“Since we first invested in senior direct loans in Europe in 2015, our PDF portfolio has topped 350 billion won ($327 million) in value. Most of them carry variable rates.”

“Because we have a mature liability structure, we prefer secondaries to primaries and favor lending over equity investment.”

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

“We have been investing in private debts on a steady basis. In high-valuation markets, loan investment is more accessible than equity investment.”

“But in the upward interest rate cycle, we need to think hard if credit strategy still has merit. An increase in LIBOR will have a positive impact, but spreads may move in the opposite direction.”

“Because there are so many and popular (private debt) funds launched that there are concerns about future deal flows. We prefer funds with their own color and differentiated deal sourcing capability, rather than those with plain vanilla strategy.”

“Credit funds emphasize zero default rates as their advantage but on the flip side, it means they have not experienced a hard time. What matters the most is their risk management ability. We prefer GPs which experienced stressful situations and made an exit in such a condition.”

▶Teachers’ Pension (Young Sin Jeong, head of global alternative investment team):

“We executed direct mezzanine lending in Europe this year. We will continue to raise credit exposure. For credit strategy, we are in the process of selecting GPs for mezzanine direct lending. We plan to give an additional mandate in the second half.”

“We have been investing in credit strategy since 2013. Credit strategy takes about one third of our global alternatives.”

▶KB Insurance (Woong Hwang, investment manager):

“The 5% risk-retention rule on new CLOs in the US was lifted as of May 10. It opened the door to those who have yet to participate in the market. Europe may also loosen capital regulations, following in the footsteps of the US. Competition in the leveraged loan market is likely to rise.”

“Private debt covenants are being loosened, which means a weakening of lenders’ monitoring power. As an investor, we cannot help but choose a riskier investment.”

“We need to take a conservative approach in the view that the credit cycle is nearing the peak and need to strengthen risk management and have more control over sponsors.”

“We are highly interested in mid-market first loans and considering SMA investment.”

By Daehun Kim and Donghun Lee

daepun@hankyung.com