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Korean investors' survey

Korean investors pick private debt as preferred asset class

Oct 27, 2020 (Gmt+09:00)

South Korea’s institutional investors, including pension funds, mutual aid associations and insurers, plan to increase the private debt portion of their alternative investments the most. They also chose real estate as the most overvalued asset type among major alternative asset types, including real estate, infrastructure, private equity and more.

Currently, overseas investments account for 60.5%, with domestic investments holding 39.5% from the overall alternative investments made by Korean institutional investors.

Korean investors pick private debt as preferred asset class

Based on a survey conducted by The Korea Economic Daily, 76.5% responded that they plan to increase alternative investments, while 23.5% said that there would be no change and none mentioned plans to decrease their investments.

Some 17 institutional investors, including the National Pension Service (NPS), Government Employees Pension Service (GEPS), Korea Investment Corporation (KIC), The Korean Teachers' Credit Union (KTCU) and others participated in the survey.

AMPLE CASH FLOW MAKES PRIVATE DEBT ATTRACTIVE

Among the respondents, 64.7% said they will boost their investments in private debt, followed by private equity (41.2%), infrastructure (35.3%), real estate (17.6%) and multi-assets (5.9%).

Korean investors pick private debt as preferred asset class

Securing a steady cash flow (52.9%) was the biggest reason why institutional investors chose private debt as an attractive investment asset type. Other reasons included investing in private debt as a fixed income substitute (29.4%) and diversifying their portfolio (5.9%).

Jang Dong-hun, the chief investment officer at Public Officials Benefit Association (POBA) said: “Investors can expect stable yearly returns in the 5-6% range from private debt investment, which makes it all the more attractive as a safe investment product in a period of low-interest rates.” He added, “Private debt is sought after by institutional investors like POBA where it is important to maintain a steady flow of cash.”

ON ALTERNATIVE ASSET VALUATIONS

Over 76% of the survey participants said that real estate prices are overhyped, with 11.8% saying real estate is highly overvalued and 64.7% saying overvalued. Also, more than half of the respondents said that infrastructure assets are highly overvalued (5.9%) and overvalued (52.9%).

Korean investors pick private debt as preferred asset class

The widespread coronavirus crisis has had a huge impact on investors' real estate investment plans. From the respondents, 47.1% said they will scale down hotel investments and 35.3% said they will reduce investments in retail facilities. Meanwhile, 47.1% said they will increase investments in logistics facilities, which are expected to benefit from the rise in online shopping.

Private debt was considered to be fairly valued by 52.9% of the respondents as the most preferred asset type.

After the global financial crisis in 2008, bank deleveraging prompted private capital such as pension funds to jump into the market. This spurred investment opportunities for Korean investors, who began to aggressively invest in debt products around five to six years ago.

Private equity products remained an attractive investment for Korean investors, with 35.3% of the respondents saying they are overvalued and 29.4% saying they are fairly valued.

MULTI ASSETS ON THE RISE

As for absolute return strategies, 5.9% of respondents said they would invest in multi-asset classes while hedge funds received zero response. Korean institutional investors are still reluctant to invest in hedge funds and only big investors like NPS, KIC and Korea Post invest in them, which is why multi-asset investments are on the rise as an alternative for absolute return strategies.

Alternative investments are expected to post yearly expected returns of 5.6%, with 5.7% in overseas investments and 4.80% at home.

Write to Chang-jae Yoo and Seon-Pyo Hong at yoocool@hankyung.com

Danbee Lee edited this article.

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