Skip to content
  • KOSPI 2746.63 +0.81 +0.03%
  • KOSDAQ 905.50 -4.55 -0.50%
  • KOSPI200 374.63 +1.41 +0.38%
  • USD/KRW 1347.5 -3.5 -0.26%
  • JPY100/KRW 890.53 -1.9 -0.21%
  • EUR/KRW 1453.14 -4.39 -0.3%
  • CNH/KRW 185.76 -0.27 -0.15%
View Market Snapshot
Interview

Korean police fund raises risk appetite for private debt

By Oct 27, 2020 (Gmt+09:00)

6 Min read

South Korea’s Police Mutual Aid Association (PMAA) has recently selected an opportunistic strategy fund for private debt investment as the $3 billion savings fund is moving up its risk spectrum towards distressed and mezzanine assets, said its Chief Investment Officer Lee Do-yoon.

While increasing exposure to infrastructure and private debts for higher yields, PMAA is struggling with a shrinking pool of targets in the direct lending segment amid a massive liquidity injection by central banks and governments.

“Our top priority is to secure a 4% annual return on investments, given the fixed rate of 3.58% we offered to our subscribers and other expenses,” Lee told The Korea Economic Daily in a recent interview.

“Direct lending funds, to which we have committed, have not been executing investments because governments are providing policy money to ailing companies. So we are looking at opportunistic and distressed investments."


Police Mutual Aid Association's Chief Investment Officer Lee Do-yoon
Police Mutual Aid Association's Chief Investment Officer Lee Do-yoon

In the prolonged pandemic era, PMAA has been investing in overseas alternative assets through top management firms with a track record, given the difficulty of performing on-site due diligence, Lee said. But it has steered away from sell-down assets proposed by brokerage and asset managers since Lee took office as CIO in October 2016.

PMAA manages 3.4 trillion won ($3 billion) in assets as of the end of 2019, of which alternatives investments account for half. It plans to increase the portion of overseas alternatives to 67% by 2023 from the current 60%.

Lee is retiring at the end of this month after serving four years as CIO.

The following is the transcript of the interview:

On PMAA’s overseas investment so far this year:

“We are investing through global management companies to which we have given mandates previously, or those we have conducted due diligence on before. It is difficult to select a new management company, given the difficulty of performing on-site due diligence either at home or abroad in the pandemic situation. We are investing selectively with global management companies with a proven track record.”

On future portion of overseas investments:

“Of our total AUM of 3.39 trillion won, alternatives make up half at 1.7 trillion won. The portion of overseas investments will go up to 67% from the current 60% of alternatives.”

“Of infrastructure investment, overseas portfolios take a bigger portion because there are not many investable assets at home. In private debt investment, overseas investments take a bigger share, while domestic assets account for a bigger portion of PEF. We will increase the overseas PEF portion in the medium term.”

▶ On investment difficulties in the extended low interest environment:

“Our priority is to find assets that replace conventional fixed-income investments and generate higher yields. Given this, we have to look at mezzanine investment aggressively.”

“In light of the 3.58% return we guaranteed our subscribers annually, we have to make at least a 4% return annually, which is difficult to achieve from bonds. In the extended low-interest era, new money inflow (from subscribers) is being accumulated into short-term funds.”

“Following the coronavirus outbreak, some funds were liquidated earlier than expected. On top of the money inflow from the liquidated funds, foreign blind pool funds, to which we have committed, have not called in capital.”

“We allocate 10% of total assets to equities, as stipulated in the articles of association.”

▶ On fixed income investment strategy:

“Of the 240 billion won earmarked for fixed income this year, we executed investment for about 100 billion won between January and February. Most of them are hybrid securities, rather than conventional bonds.”

“Despite having high credit ratings, many companies issue hybrid bonds in consideration of BIS capital ratios. They have lower credit risk and produce returns thanks to market liquidity.”

“I simplified the investment approval process two years ago. Instead of seeking approval for every A-rated bond investment from our investment review committee, we set a quota for A-rated bond investment in advance and invest within the limit.”

▶ On private debt investment strategy:

“Direct lending funds, to which have committed, have not been executing investments because governments around the world are providing policy money to ailing companies. So we are also looking at opportunistic and distressed investments, and recently selected an opportunistic investment fund house. For distressed investment, it is difficult to find investment targets.”

▶ On selection criteria on domestic PEFs and venture capital firms:

“We will select leading PEFs to which National Pension Service and other anchor investors committed. For VC investment, we will select two firms among those selected by Korea Growth Investment Corp. and Korea Development Bank. We don’t have enough physical capacity to review all management companies.”

“Previously, we had selected PEFs with buyout and growth capital strategies. Recently, we picked a domestic mezzanine investment firm.”

“For secondary investment, we target funds with a remaining term of four to five years. We gave mandates to Ardian and Colon recently, and Macquarie and Brookfield for infrastructure investment.”

(Note: Korea Growth Investment Corp. is a state-run fund of funds management company.)

▶ Your top picks in the infrastructure sector:

“We prefer data centers/communication and renewable energy facilities. None of our infrastructure investment have been sold down.”

▶ Your priority since inaugurated as CIO?

“After taking office, I stopped reviewing project deals brought by domestic brokerage and management companies. If we leave deal sourcing to them, we will be unable to see the big picture and will have a biased perspective on the market. Those agents tend to bring in deals in their own best interest or that produce big margins for them.”

“In the alternative investment process, we need to separate deal sourcing from asset allocating.”

“In the infrastructure and private debt investment areas, there are global managers with a track record. I set up a culture of studying and discuss about where global institutional investors such as CalPERS, CalSTRS and Norway’s GPFG are investing and interested.”

▶ On your in-house training system:

“Since I took office, I introduced a brainstorming meeting every morning to study and analyze alternative investment trends and areas in which global institutional investors invest.”

“When selecting an alternative investment firm and reviewing an investment deal, we invite securities investment and investment strategy teams to a meeting to share ideas. I made efforts to build insight into the investment themes of global management companies and enhance our capabilities in selecting management firms.”

Write to Junho Cha and Sang-eun Lucia Lee at chacha@hankyung.com
 

Yeonhee Kim edited this article.
More to Read
Comment 0
0/300