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ASK Summit 2020

Korean LPs to boost protection against unforeseen events

By Nov 03, 2020 (Gmt+09:00)

The prolonged coronavirus era is pushing South Korean asset owners, including the Teachers’ Pension and insurance firms, to tighten contracts for new infrastructure deals to enhance protection against unforeseen events such as the current global pandemic, as they work to increase vigilance on investment risk.

“The COVID-19 situation has reminded us of the importance of a contractual liability for infrastructure assets,” said Lotte Non-Life Insurance’s alternative investment head Lee Jang-Hwan.

“Assets under a tightly written contract remain solid, even in a situation like the current one. But private power plants, contracts of which were loosely written, show high vulnerability to market conditions,” he told Real Estate Infrastructure panel at the ASK Summit 2020 held in Seoul Oct. 28.  
Crestline Investors Partner Frank Jordan speaks during the ASK 2020 summit Oct. 28
Crestline Investors Partner Frank Jordan speaks during the ASK 2020 summit Oct. 28

Lee and two senior investment managers from the Teachers’ Pension and ABL Life Insurance Co. remain focused on safe-haven assets such as deals sponsored by a government, or companies with high credit ratings. Simultaneously, they are seeking to venture into riskier assets within the infrastructure segment in search of yields.

To expand exposure to assets beyond core assets, Teachers’ Pension, a $17 billion pension scheme, will continue to work mainly with its existing general partners (GPs), said its global investment head Jeong Young-Sin.

In comparison, ABL Life Insurance Co., owned by China's Dajia Insurance Group, favors GPs with local information and accessibility to potential deals, as well as those with a specialty. In particular, it is interested in tailor-made infrastructure investments.

“Previously, infrastructure investment was like going to a shopping mall and picking out a shoe from a well-displayed assortment. Now it's more like picking out our favorite design and leather first and then ordering custom-made shoes,” said Eoh Jiroo, head of ABL Life’s infrastructure & real asset investment.

The following are key remarks from senior investment officials from the Teachers' Pension and two insurance companies in South Korea:

ON COVID-19 IMPACT ON INFRASTRUCTURE PORTFOLIO, RELEVANT ISSUES

▶ LOTTE NON-LIFE INSURANCE, HEAD OF ALTERNATIVE INVESTMENT, LEE JANG-HWAN:

“Financial markets have trended upward and stabilized thanks to the liquidity supplied by central banks. But that is not the case with the real asset market which includes infrastructure assets. There remains a gap between them and there is an optical illusion.”

“The COVID-19 situation has reminded us of the importance of a contractual liability for infrastructure assets. In other words, assets under a tightly written contract remain solid, even in a situation like the current one. But private power plants, contracts of which were loosely written, show high vulnerability to market conditions. Further, the shale oil and gas midstream infrastructure, which tend to be affected by oil prices, is not performing well.”

“The entity responsible for cash flow is important, too. Prices in public-private partnership (PPP) assets, for which countries with sovereign ratings of AA minus or above are held accountable, have increased since the coronavirus outbreak.”

“Our concern is how long this COVID-19 situation will last. If it continues through next year, infrastructure under loosely written contracts will take a further hit and their asset values may decline further under the fair value model.”

▶ ABL LIFE INSURANCE, HEAD OF INFRASTRUCTURE & REAL ASSET INVESTMENT, EOH JIROO:

“Dividend-paying assets are faring well, but value-add assets are struggling a lot. This economic recovery is turning out to be a U-shape, unlike the V-shaped recovery we saw in the wake of the SARS outbreak. The dragging economic recovery will raise issues about exit valuations, as well as valuations on new investments. We may wonder if we need to add a risk premium, if so, how much it will be and if the asset price is appropriate.”

HOW TO RESPOND TO ANOTHER SITUATION LIKE COVID-19?

▶ ABL LIFE INSURANCE:

“If an event like COVID-19 happens again, we will take a hit again. We cannot help it. But next year, inflation and liquidity will prop up valuations, which bode well for the investment environment. COVID-19 prompted us to reshuffle the infrastructure portfolio.”

“We need to redefine the asset classes of roads, railways and airports, which we had classified as core assets, to know if they are still core assets. In the extended low-interest environment, insurance companies still need to generate investment returns. We are wondering if we can venture into value-add assets beyond core assets, and if so, how big our exposure will be. Because of the new solvency rules under K-ICS (Korean Insurance Capital Standard) that will take effect in one to two years, we also need to consider equity-to-debt ratios.”

“Previously, we just needed to allow for reasonable doubt with a focus on risks. But COVID-19 was beyond common sense. From now on, we need to take into account possible extreme situations when considering new investment.”

▶ LOTTE NON-LIFE INSURANCE:

“It was the first time in my life, I am in my mid-40s, to experience lockdowns and not sending kids to school. Such unprecedented events will likely continue to happen in the future. From the perspective of an investor, we need to select investments that generate a steady cash flow, in consideration of the contract safety and the credit rating of the cash flow provider.”

“It will be only those assets such as high availability infrastructure, which the government pays for regardless of use and those under a power procurement agreement (PPA) that could be protected in extreme situations. Our counterparty, even if it is not a country, needs to have an S&P credit rating of A at least. COVID-19 increased our preference for such assets. For rebalancing, we may take profit from making hard discounts on assets. But our portfolio rebalancing will be focused on assets generating a steady cash flow.”  

ON RECENT INVESTMENT TRENDS, COMMENTS ON ASSET MANAGERS

▶TEACHERS’ PENSION GLOBAL INVESTMENT HEAD JEONG YOUNG-SIN:

“Traditional infrastructure assets such as railways, harbors, roads and power plants make money from the movement of people and goods. But given the travel restrictions since the coronavirus outbreak, the value of traditional infrastructure assets is declining.”

“Now we are receiving new investment proposals from GPs for various projects ranging from renewable energy and digital infrastructure to data communication. Taken one by one, they are not totally new investment proposals. As infrastructure and real estate overlap with corporate finance, the type and structure of their investments become complicated.”

“Alternative investments target excess returns triggered by information asymmetry on the investment targets. We want GPs to provide new knowledge and good information to help pension funds make decisions easily.”

ON CURRENT TRENDS IN INFRASTRUCTURE INVESTMENT

▶ LOTTE NON-LIFE INSURANCE:

“The ESG theme is important for alternative investors whether it is eco-friendly or not. We used to receive investment proposals for the coal industry. But we cannot invest in an industry harmful to the environment. Global investment banks have embraced ESG criteria and stopped investing in the coal industry. This means refinancing risk and exit risk from coal investment.”

“For renewable energy and digital center investments, the key is pricing. Recently, there is a growing demand for logistics centers in the real estate sector and renewable energy and digital centers in the infrastructure sector. This has led to high prices. We need to question if such prices can be justified.”

“Regarding renewable energy, the (South Korean) government is working on the Green New Deal project. Insurance companies may lean toward renewable energy investment for which we can get preferential treatment for the calculation of risk coefficient and risk-based capital ratios. However, there is no advantage for insurance companies to invest in digital centers and non-contact businesses.”

ON RELATIONSHIP BUILDING WITH ASSET MANAGERS

▶TEACHERS’ PENSION:

“Teachers’ Pension prefers portfolio investments through blind pool funds to secure stable returns. To maximize returns, we are also making cost-saving efforts. In the extended low-interest environment, we see risk appetite rising and we cannot help but invest in them to increase the portion of alternative investments. To this end, we will maintain our relationships with the GPs we have worked with and with whom we have built mutual trust.”

▶ ABL LIFE INSURANCE:

“Experience, communication and mapping are our three keywords to select GPs. When we invest through GPs, some of them are a good fit with us and others are not. Previously, infrastructure investment was like going to a shopping mall and pick out a shoe among a well-displayed assortment. Now it is more like picking out our favorite design and leather first and then ordering custom-made shoes.”

“This crisis management experience provided an opportunity to verify GPs’ internal controls and compliance. It has led us to decide with which GPs we will work more.

“After consultation and communication about investment guidelines, we invest through GPs that fit our characteristics. After picking GPs that fit with us, the last thing we do with GPs is mapping by asset class and strategy type.”

“To our familiar regions and sectors, we invest aggressively on a large scale. But we conservatively approach the countries on which information is limited. Given the sharp decline in cross-border capital flows, local information, accessibility and GPs’ specialties became more important.”

Write to Hyun-il Lee at hiuneal@hankyung.com

Yeonhee Kim edited this article.

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