Korean teachers’ fund keen on equities, M&A deals

The Korean Teachers’ Credit Union (KTCU), a $29 billion savings fund, will increase its exposure to equities markets and M&A financing deals as the prolonged economic slowdown is expected to force companies to offload marginal businesses and non-core assets, its chief investment officer said in a recent interview.

It plans to commit hundreds of millions of dollars to new blind-pool funds in the first half of next year while boosting the outstanding balance of its equities portfolio to 7 trillion won ($6.1 billion) by the end of 2021 from the current 5.5 trillion won, CIO Kim Ho Hyun told The Korea Economic Daily.

“Around the time when global economic stimulus measures come to an end, marginal companies will likely hit the market. M&A and corporate financing deals will pick up,” Kim said.

“We are looking for investment opportunities arising from non-core asset sales by conglomerates as part of their business restructuring. We will aggressively grab investment opportunities by utilizing our short-term money.”  

Currently the savings fund is set to launch a 1.5 trillion won loan fund jointly with other Korean asset owners to finance M&A deals led by private equity firms.

Last year, it agreed to set up a $1 billion joint fund with SK Holdings Co. to make cross-border investments in high-growth businesses.

Since joining the KTCU in 1991, Kim has handled equities investments and overseen capital allocation to private equity funds. He took office as its CIO in January 2019 for a three-year term.

Under his leadership, KTCU has pushed up overseas private equity investments by 90% to 1.9 trillion won over the past one and a half years. In the first half of this year, KTCU posted an average investment return of 5.4%, outperforming other Korean pension funds. 

Recently it pocketed returns nearly four times its $37.6 million investment in the US cloud-based platform provider Ellie Mae in just 18 months. It made the investment via a US blind-pool fund.

In an interview in February 2019, CIO Kim said it would actively chase equity investments for hefty returns.


The following is the full transcript of the interview. 

▶ KTCU’s asset allocation plans:

(Overseas alternative investments account for 32% of the Korean Teachers' Credit Union's (KTCU) 33 trillion won ($29 billion) in assets as of the end of June, 2020.)

“As of the end of June, equities make up about 5.5 trillion won (16.6%); fixed incomes at 6.8 trillion won (20.8%); alternatives at 18.2 trillion won (55.1%); and short-term money at 2.4 trillion won (7.5%).”

“Last year, we invested heavily in real estate and infrastructure, targeting assets with limited downside risk. We expect M&A and equities markets to provide substantial upside potential and will focus our investment into them.”

“I want to increase the equities portion to 7 trillion won from the current 5.5 trillion won.”

▶ On alternative investments:

“We are keen on M&A-related investments. We will invest in funds targeting distressed assets and companies in special situations. Around the time when global economic stimulus measures come to an end, marginal companies will likely hit the market. M&A and corporate financing deals will pick up.”

“As for infrastructure, we are focusing on public private partnership (PPP) projects in developed countries, renewable energy and data enters. For domestic real estate investment, we are looking to invest in mezzanine and loan funds.”

▶ Investment plans in special situation funds:

“Last year, we committed a total of 353 billion won to five special situation (SS) fund managers. To three of them, we have injected 60-80% of our committed capital.”

“We are looking for investment opportunities arising from market volatility caused by the COVID-19 and the US presidential election. For example, we are considering investing in SS funds targeting assets, where there can be price gaps given market dislocations due to forced selling.”

▶ On KTCU’s risk profile:

“Given that we offer a fixed rate of 3.7% to our subscribers, we put more focus on medium-risk, medium-return assets than other pension funds. We are leaning towards mezzanine, PPP and private debt funds.”

▶ KTCU’s level of alternative investments:

“Alternatives have accounted for less than 60% between 48.6% and 57.5% since 2017. Between domestic and overseas investments, a 50:50 split seems appropriate.”

“Our investment in the overseas corporate finance sector is divided into private equity and private debt at 58% and 42%, respectively, as of the end of June.”

▶ On KTCU’s global asset manager selection criteria:

“Given the difficulty in conducting due diligence on asset managers due to the COVID-19, we cannot help but turn to global firms with talented managers and proven track records.”

▶ On private equity and venture capital investments:

“To keep up with the growing venture capital market, we will commit a total of 150 billion won to about 10 new venture capital firms in the second half of this year. This will be our largest commitment ever to VC firms.”

“For PEF deals, we are looking for investment opportunities arising from non-core asset sales by conglomerates as part of their business restructuring. We will commit hundreds of billions of won to new blind pool funds in the first half of next year.”

▶ On herd behavior by Korean pension funds in infrastructure and real estate investments:

“We are diversifying deal-sourcing channels into co-investment beyond project and blind pool funds. For project investments, we selectively invest in assets with limited downside risk, or those with a low risk of principal loss. For blind pool funds, we focus on managers with a strong track record and a proven investment strategy.”

“We are aggressively exploring co-investment opportunities with the asset managers to which we have committed capital, as well.”

▶ On the economic outlook:

“Given the prolonged low interest rate policy and central banks’ aggressive economic stimulus measures, which are expected to remain in place longer term, I don’t expect the global economy to plunge into a steep downturn in the short term.”

▶ On environmental, social and governance (ESG) investment:

“In Sefptember 2017, we created a clause regarding the stewardship code introduction in our asset management guidelines. We are taking into consideration ESG factors from the early stages of new investment evaluation. If necessary, we will change our investment guidelines to gradually expand ESG investments.”

▶ On the Korean stock market:

“The KOSPI has been in a moderate corrective mode after topping 2,400 points. It will likely find downside support at around 2,200 this year. If it slides further to the level of 2,250, it will be seen as a reasonable retracement after a short-term rally.”


Write to Jun Ho Cha and Sang-eun Lucia Lee at chacha@hankyung.com
Yeonhee Kim edited this article.