[Interview] GEPS to boost PE secondary investment: CIO

The Government Employees Pension Service (GEPS) will ramp up global private equity secondary investment and focus real estate investment on easy-to-trade office buildings in developed countries, its chief investment officer said, as the South Korean pension fund puts a priority on securing liquidity.

With an investment horizon of five to seven years, the $8.7 billion pension scheme targets assets for annual returns of 6-7%, its CIO Won-joo Seo told the Korean Investors in an interview on June 3.

Unlike other major South Korean pension funds of which assets continue to increase, GEPS finds it difficult to invest in real estate, infrastructure and private equity funds with a term of about 10 years because of shortfalls in its balance sheet.

“But if we buy equity interests in (private equity) funds coming to market before maturity, we can solve the problem,” Seo said.

He was installed as CIO last month after serving as CIO of formerly-known PCA Life Insurance Co. Ltd. (currently, Mirae Asset Life Insurance Co. Ltd.) between 2014 and 2018.

GEPS’ top priorities are securing liquidity and simultaneously boosting investment returns, Seo noted, given that its benefit payments have exceeded incoming contributions for 26 years. The government covered the shortfalls.

On May 15, GEPS’ private market investment head Woncheol Seo said in a panel session of the ASK 2019 Private Debt & Private Equity Summit that it would consider the leverage factor when selecting private equity secondary funds as PE secondary funds are increasingly use borrowing to bolster returns.

The following are Q&As with Seo.

▶ On asset management strategy:

“Because of the increased global market volatility, GEPS and other major pension funds (in South Korea) reported their first investment losses since 2008 at the end of last year. To reduce portfolio volatility and stabilize returns, we will raise the proportion of alternatives to 32% of our total portfolio over the next five years from the current 20%. The proportion of overseas assets will be increased further from the current 50%.”

“For the time being, we will focus on assets generating stable cash flows such as rental incomes with an investment horizon of five to seven years to secure liquidity, rather than chasing long-term capital gains.”

“Unlike the National Pension Fund and the Teachers’ Pension of which assets continue to rise and therefore can invest with a long investment horizon of over 10 years, GEPS is difficult to make long-term investment because benefit payments have already exceeded incoming contributions.”

“Because we have to continue to pay pensions, we need to maintain the proportion of liquid assets at 10% or above, which is higher than that of the NPS and other pension funds.”

▶ Any new asset class to diversify into:

“We are looking closely at private equity secondaries which give us an opportunity to invest in new funds to which we cannot commit because of difficulty with matching their terms and conditions. They also mitigate the J-curve effect.”

“We haven’t set a quota for them, but we are making a list of them to invest when an opportunity comes.”

▶ On real estate investment:

“Returns from overseas real estate and infrastructure investments have recently declined to 6% per year from the previous 8%. GEPS is looking for assets for a target return of 6-7%.”

“Rather than chasing capital gains from real estate, we will continue to concentrate on large-size buildings in big cities in developed countries which generate stable cash flows and are easy to sell.”

▶ Breakdown of alternative investments:

“Real estate accounts for 30-40%; private equity and private debt 35-40% and infrastructure and other social overhead capital projects 15-20%.”

▶ On hedge fund investment:

“Rather than chasing traditional hedge funds such as long/short equity funds, we are investing in multi-asset funds. We invested 100 billion won ($85 million) last year and will invest a similar amount this year. We will select a domestic management firm to invest in a global manager's fund with a track record.”

▶ On equity portfolio:

“We will cut its proportion as a whole. By region, we will cut exposure to domestic stocks, but increase the proportion of overseas equities.”

“Of global equities investment, we track the MSCI World index, so nearly 90% is invested in developed markets.”

▶ On traditional assets:

“Of traditional assets, we will raise the proportion of overseas investments to 28% from the current 20% to diversify portfolio and reduce its volatility.”

▶ On currency risk:

“We currency-hedge 100% of our fixed-income investments, but we don’t hedge against overseas equities. For alternatives, we currency-hedge on a case-by-case basis.”

By Hyun-il Lee

hiuneal@hankyung.com