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NongHyup looks to expand KIC co-investment beyond PE

Nov 06, 2020 (Gmt+09:00)

South Korea’s National Agricultural Cooperative Federation (NACF), or NongHyup Bank, is willing to expand its co-investment partnership with Korea Investment Corporation (KIC) into real estate and infrastructure beyond private equity, the cooperative’s Chief Investment Officer Park Hak-joo said.

NongHyup launched a $400 million joint venture with the sovereign wealth fund in July to co-invest in overseas private equity deals, as it gears up to increase alternative investment. In the venture, NongHyup will inject $100 million.

“KIC has a good global network and we have excellent capabilities to analyze and evaluate companies. In cooperation, we will get accurate valuations on deals,” Park told The Korea Economic Daily in a recent interview.

“In particular, we will be able to create synergy, if we invest aggressively in real estate and infrastructure when prices turn lower.”
NongHyup's CIO Park Hak-joo
NongHyup's CIO Park Hak-joo

NongHyup oversees 110 trillion won ($98 billion) in assets of its 4,500 community banks and branches spread across the country. It serves as their central bank.

Of its investment assets of 100 trillion won, fixed income makes up 80%, with alternatives at 10%. Over 50 in-house managers oversee the investment assets.

The cooperative has invested in overseas alternatives through blind pool funds, or taking sell-down assets from domestic investment firms.

It is expecting mid-10% returns on average from alternative investments.

CIO Park has been handling NongHyup’s asset management for 30 years, since joining the institution in 1990. He was installed as CIO in January of this year.

The following is a transcript of the interview:

▲ How is NongHyup different from pension funds and mutual aid associations in terms of investment strategy?

“As a non-banking deposit-taking institution, we are subject to special accounting standards. Thus, we are restricted from making reckless investments in high-risk, high-return assets. We need to maintain reserves at a stable level. That is why our portfolio is heavily weighted towards fixed income, generating interest income on a regular basis. In (South Korean) bond markets, we are the frontrunner and the largest investor.”

▲ On strength in fixed income investment:

“Based on our long experience in bond investment, we have excellent capabilities to analyze corporate bonds. We revalue bonds based on our own standards. I think we are the top institutional investor in the country in terms of capability of analyzing and evaluating corporate bonds.”

▲ On asset allocation and investment breakdown:

"Fixed income accounts for 80%, with alternatives at around 10%. Equities make up the remainder. Fixed income investment is split between domestic and overseas assets at a ratio of 85 to 15. Of overseas fixed income, direct investment makes up the vast majority. To keep up with the recent investment trend, we are expanding alternative investments.”

▲ On detailed alternative investment strategy:

"Since we began alternative investments in 2015, we have been increasing their portion due to low interest rates. During our first few years into the investment, we invested mainly in debt. Recently, we are expanding equity-type investments.”

“Within the alternative investment segment, domestic PEF takes 15%, with real estate at 30% and infrastructure at 20%. M&A deals, including overseas PEFs, account for the remaining 35%. We will maintain the portion of both real estate and infrastructure at 50%.”

“Our real estate investment is split between domestic and overseas portfolios at a ratio of 8 to 2. Infrastructure investment is divided between domestic and overseas deals at a ratio of 4 to 6. Recently, the ratio of overseas infrastructure has been on the rise. At home, we make direct investment in roads and other infrastructure facilities.”

“For overseas investment, we invest indirectly via global asset managers, or taking sell-down on a project basis from domestic asset managers.”

▲ On your key criteria for global GP selection:

“First of all, we look at the performance of their series funds using the same strategy. We also look at how they responded to the (2008) global financial crisis, as well as how qualified their professional employees are.”

▲ On investment strategy change in the current pandemic situation:

“We made assumptions under each scenario. For example, how can we respond to rising stock markets that tend to be accompanied by bond yield rises? What if a black swan event, or a financial crisis — which tends to happen every five to ten years — occurs?”

“Unlike pension funds and mutual aid associations, we must make positive returns in absolute terms given any circumstance because we take responsibility for operating expenses and annual interest rates paid to deposit accounts.”

“We managed to stay positive this year. In March, we invested 1.2 trillion won intensively in 30-year US Treasuries and global blue-chip corporate bonds to take advantage of the widening credit spreads following the coronavirus outbreak, which generated decent returns. In stocks, we outperformed the markets after bargain hunting and holding off stop-loss selling."

▲ On 2021 investment strategy in the extended pandemic era:

“It looks highly likely we will see another wave of the COVID-19. From the investor perspective, a delay in economic recovery and vaccine development could be positive news to financial markets. The US will likely continue to inject dollars, the world’s reserve currency, into markets to boost liquidity. Once a coronavirus vaccine is developed and the economy turns around, they will try to collect the money. Then, we may need to cash out of our investments and sharply reduce the portions of equities and risky assets.”

“There will be no big change (to NongHyup's investment strategy) immediately. We will continue to look for bargain-hunting opportunities for equities, and gradually increase the alternatives portion for portfolio diversification. We are expecting mid-10% returns from alternative investments on average.”

▲ On the $400 mn JV with KIC for private equity co-investment:

“It is basically aimed at an exchange of employees and information between the two institutions, which share quasi-public characteristics. We are now at the beginning stage. KIC has a good global network and we have excellent capabilities to analyze and evaluate companies. In cooperation, we will be able to get accurate valuations on deals.”

“In particular, we will be able to create synergy, if we invest aggressively in real estate and infrastructure when prices turn lower.”

By Chae-Yeon Kim 

Yeonhee Kim edited this article.

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