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Alternative investments

Korea Ratings forays into online due diligence for alternatives

By Mar 07, 2021 (Gmt+09:00)

4 Min read

(Source: Getty Images Bank)
(Source: Getty Images Bank)
South Korea’s leading credit rating and business valuation services provider, Korea Ratings, has stepped into the online due diligence service market for domestic institutional investors, struggling to conduct onsite assessments on overseas alternative assets due to the global pandemic.

In July and August 2020, the ratings agency carried out online due diligence on a portfolio of four onshore US wind power complexes across the three US states of Illinois, Nebraska and Texas on behalf of a consortium of Korean institutions, including Hana Financial Investment, Korea Investment & Securities and the state-run Korea Hydro & Nuclear Power Co.

The consortium, which also includes two Seoul-based asset managers Alpha Asset Management Co. and Sprott Korea Investment Corp., has acquired a 49.9% equity interest in the portfolio for an undisclosed sum. They are now in the process of selling down part of their stake in the assets, according to financial industry sources last week.

After completing a business valuation on the portfolio, Korea Ratings had proposed it perform virtual due diligence on the wind farms for the institutional investors whose overseas business trips were banned due to the pandemic.

It teamed up with the US-based investment advisor Orchid Group, one of its existing business partners, for the due diligence. The ratings agency made full use of the knowledge it gained from the business valuation, including their ownership structure, business model, market environment and potential risk factors.

With a combined 852 megawatts of generation capacity, the four wind power complexes began operations between 2012 and 2015. General Electric Co. is operating and managing the wind farms in electricity supply contracts for an additional eight to 18 years.

STANDARDIZED METHODS

For the virtual site assessments, Korea Ratings hired a US company to video record the facilities and had its US partner Orchid Group visit each of the wind farms to meet with their managers. The Korean company specified which of the facilities needed to be recorded and whom to interview at the sites, deemed essential for Korean investors' decision-making.

“It took about one month to draw up specific plans with domestic brokerage firms, asset managers and Orchid Group about arranging onsite visits, the video content and selecting the interviewees,” Korea Ratings’ energy and infrastructure head Shin Yong-chul told the Market Insight.

“Drones captured the whole areas surrounding the wind farms, and provided detailed views of the inside of the wind power generators. We thoroughly inspected them,” Shin noted. Market Insight is the capital news arm of The Korea Economic Daily.  

Based on the experience with the four US wind power complexes, Korea Ratings has developed standardized methods on remote due diligence. 

FOCUS ON ENERGY, INFRASTRUCTURE

The agency will offer online due diligence services only for energy and infrastructure assets abroad, on which business valuations are already completed.

Specifically, the energy and infrastructure assets under its coverage will be thermal power, combined heat and power, wind, solar and hydroelectric power plants; oil and gas fields; harbors; airports; and data centers. Further, they must be located in the countries such as the US, Japan, Australia and five unidentified European countries, where Korean institutional investors engage in active investing and Korea Ratings has long-term local business partners.

"For energy and infrastructure assets such as power plants, roads and tunnels, we are able to know exactly through online due diligence whether they physically exist and can verify their legal ownerships,” said Korea Ratings' Shin.

“They are much easier to evaluate, compared to commercial and office buildings for which we need to check additionally whether they are near a commercial district and have good transportation, in addition to their tenancy status and vacancy rate," he added.

Korea Ratings has conducted business valuations for 128 overseas alternative projects since 2016, ranging from renewable and biomass energy, thermal power and waste treatment business to logistics and transportation sectors.

REGULATORY NOD

South Korean regulators gave a nod to online due diligence as an alternative to onsite assessment. The Financial Supervisory Service allowed brokerage firms to replace onsite due diligence, which the regulator made necessary for their overseas alternative investments, with an alternative procedure in a pandemic situation, according to its guideline on brokerage companies’ risk management of alternative investments released in January of this year.

Online due diligence could enhance the efficiency of the investment review process by having those involved in the investment share the video recording of an onsite visit. Previously, Korean institutional investors participating in the same project made separate site visits after failing to adjust their schedules.

Additionally, the video recordings can be used as educational materials for new investment managers and employees of financial services companies, Korea Ratings’ Shin added.

Write to Seon-Pyo Hong at rickey@hankyung.com
 

Yeonhee Kim edited this article.
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  • jerry lee

    2021-03-10 16:05:25 (Gmt+09:00)

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