Korean pension funds’ CIOs look to diversify GP pool

South Korean pension funds are seeking to diversify their pool of alternative asset managers to broaden real estate- and developed markets-focused portfolios, said chief investment officers of the country’s four leading pension and savings funds.

Following the coronavirus outbreak, Korea’s leading asset owners, including Teachers’ Pension, Public Officials Benefit Association and Korea Scientists & Engineers Mutual-Aid Association (SEMA), made overseas alternative investments mainly through their existing general partners (GPs), made up largely of top-tier global managers.

They re-upped investments in the GPs, injecting additional capital into their vehicles while also increasing the amount of investment, or ticket size, into them, as travel restrictions prevented on-site due diligence of new asset managers.

Next year, they plan to diversify portfolios by product and region, as well as asset managers, to allocate a bigger portion of their growing assets into alternatives.

“Portfolio diversification will become more important. We will welcome new proposals from GPs from other regions and with different thoughts,” Korea Scientists & Engineers Mutual Aid Association’s CIO Huh Sung-moo told a CIO panel session at the ASK Summit 2020 held in Seoul Oct. 28.  

“Due to the escalating US-China tensions, it will become important to diversify by region and industry,” Huh said, adding that non-contact due diligence is gradually replacing on-site reviews.

Meanwhile, the Public Officials Benefit Association (POBA) will expand co-investment with global pension funds beyond real estate into other alternative asset classes, as it plans to boost exposure to opportunistic and distressed investments, its CIO Jang Dong-Hun told the panel session.

POBA, a $12 billion retirement fund for South Korea’s local government employees, has set up joint ventures with pension schemes, including California State Teachers’ Retirement System (CalSTRS) and Denmark’s PFA to co-invest in overseas properties.

The following are key remarks from the chief investment officers of South Korea's four institutional investors during the CIO panel session of ASK Summit 2020:

REVIEW OF 2020 INVESTMENT

▶ Public Officials Benefit Association (POBA) CIO Jang Dong-hun:

“We are sitting on a larger pile of cash than ever following earlier-than-expected fund redemptions and delayed investment execution. In the first half of this year, we simplified the investment decision-making process and made prompt investments in REITs and listed infrastructure assets. This pandemic prompted us to think about how well our risk management method worked in such a situation.

“We invested in private equity, private debt and hedge funds mainly by re-upping our investments. We had little difficulty with private equity and private debt investment this year because the funds, to which we had committed capital to four to five years ago, called in additional capital. We re-upped our investment in them by $100 million to $300 million apiece. We committed capital to a new PE fund as well.”

(Note: POBA’s ticket size is 50 billion to 100 billion won ($44 million to $88 million) for blind pool funds and over 100 billion won for separately managed accounts.)

▶ Teachers’ Pension CIO Lee Kyu-hong:

“This pandemic situation raised the importance of risk management for alternative investment, or the importance of limiting investment losses. It was a difficult year to invest because we could not go abroad for due diligence. We invested in private equity, private debt and venture capital funds mainly through blind pool funds. For global investment, we re-upped in the funds we have committed to, and made additional investments in companies in which we have invested before.”

(Note: Teachers’ Pension targets 4-5% return.)

▶ Korea Scientists & Engineers Mutual-Aid Association (SEMA) CIO Huh Sung-moo:

“To increase overseas investment, we doubled our overseas business travel budget this year, but haven’t spent it at all.

“The biggest difficulties were reduced investment opportunities and limited on-site due diligence. “We are actively re-upping investment in the funds we have committed to and increasing our ticket size per each investment. We are trying to further diversify our portfolio.

“It is important to identify operational risk at the earliest opportunity. It will be efficient to combine similar investments for risk management, and manage risk by groups of similar investments on a quarterly basis.”

(Note: SEMA’s ticket size increased to $50 million from $30 million)

▶ Korea Federation of Community Credit Cooperatives (KFCC) CIO Richard C.S. Park:

“We began investing through blind pool funds this year and will commit around 7 trillion won to blind pool funds over the next three years. By year end, we will have committed over 2 trillion won to blind pool funds. Blind pool funds are swift in decision making and capital deployment. As for project funds, it is difficult to source a good project globally.

“We have increased alternative investments to 20 trillion won, or 30% of AUM, to diversify from low-yielding bonds, which accounted for the bulk of our investments. Of alternatives, real estate accounts for 50%, both private equity and private debt take 32%, and infrastructure takes 17%. Until now we have not invested in hedge funds and multi-asset funds because they have not fit with our institution’s characteristics. But it does not mean we will not invest in them in the future.

“In light of the uncertainty caused by coronavirus, we invested mainly in developed countries such as in North America and Europe. For private equity, new themes such as the fourth industrial revolution, environmental-friendliness and ESG are emerging. So we recently invested in a IT-related smart factory, data centers, waste management facilities, and hydrogen storage tanks, in addition to leading secondary battery makers related to electric vehicles across their value chain.”

(Note: This credit cooperatives’ ticket size is over 50 billion won for a target return of 3-4% from debt and 5-8% from equities)

2021 INVESTMENT PLAN

▶ Teachers’ Pension:

“As a long-term investor, we need to diversify investment strategies, balance their portions and vintage years. Regarding valuation concerns, we will adjust our priorities by pushing back extremely overvalued assets.'

▶ Public Officials Benefit Association:

“We will continue to expand investment in infrastructure and private debt, which have been generating steady cash flows in the COVID-19 situation. This year, we invested in distressed strategies, in which conservative institutions like us had not hardly invested before. Next year, there will be more opportunities to invest in such strategies, including opportunistic and secondary investment, and we will increase exposure to them.

“Next year, we will expand investment through joint ventures into asset classes other than real estate. We are preparing to boost such investment on a meaningful level.”

▶ Korea Scientists & Engineers Mutual-Aid Association:

“In line with our investment strategy pursuing quick and liquidity premiums, we will slightly increase the private debt portion. We will increase exposure to debt-type assets, or those that look like equity but have debt characteristics. We will shift focus into logistics, communication facilities and residential properties, away from prime office buildings in downtown areas."

“For equities, we will switch into active investing from a passive strategy, focusing on information telecom, bio and those in traditional industries but facing restructuring. Due to escalating US-China tensions, it will become important to diversify by region and industry.”

▶ Korea Federation of Community Credit Cooperatives:

“We have both characteristics of banking and insurance as a conservative institution. We are highly interested in PE investment. In this COVID-19 era, there will be good opportunities to invest in companies in a liquidity crunch or distressed conditions. Within the real estate segment, we will keep away from relatively overvalued assets, and instead look for IT and the fourth industrial revolution-related assets.”

“We are highly interested in overseas infrastructure but we could not do that much this year because of coronavirus. We want to make long-term investments in overseas infrastructure.”

ON MULTI-ASSETS 

▶ Korea Scientists & Engineers Mutual Aid Association:

“It is not long since we invested in multi-asset strategies. In light of declining expected returns and rising volatility, multi-asset strategy will be attractive in terms of investment efficiency. By diversifying our investment strategy, we will try to reduce volatility. We will increase the portion of multi-assets to 10%.”

COMMENT ON GPs

▶ Teachers’ Pension:

“On-site due diligence will be gradually replaced with non-contact due diligence. I hope GPs will help non-contact due diligence take root quickly by building trust with us.”

▶ Public Officials Benefit Association:

“Our alternative investments are 100% indirect investments made via management companies. In selecting GPs next year and in following years, we will look closely at how each GP coped with the COVID-19 impact. Next year, we will increase co-investment with global pension funds by each asset class. If they provide us with co-investment opportunities, we can make bigger, more meaningful investments than our conventional ticket size.”

▶ Korea Scientists & Engineers Mutual Aid Association:

“Portfolio diversification will become more important. We will welcome new proposals from GPs from other regions and with different thoughts. We will quickly review those proposals.”

▶ Korea Federation of Community Credit Cooperatives:

“As our asset size is growing, we need to invest abroad. But we are still wary of overseas markets. We want to invest in partnerships with GPs. When selecting GPs, our top priority is whether they will give us a co-working, co-investing opportunity. In particular, we want them to provide us with good overseas infrastructure deals.”

Write to Ri-Ahn Kim at knra@hankyung.com
Yeonhee Kim edited this article.