POBA targets PE in tech, bio, healthcare in long term, CIO says

Public Officials Benefit Association (POBA) of South Korea will keep its focus on steady cash flow while strengthening profitability, its Chief Investment Officer Huh Jang said.

Huh said POBA will increase assets for income gain, such as equity dividends, interest income and rental income, from the current proportion of 60% to more than 70% in preparation for a market crisis. Also, the pension fund is planning to intensify its profitability and diversification via private equity investments in tech, bio and healthcare, as well as increasing exposure to private credit.

Huh became the CIO in February for a three-year term. Prior to the POBA appointment, he was the head of investment at DB Insurance Co. of Korea from 2013 to 2020. Huh started his financial career at the now-defunct Tongyang Securities Inc. in 1989, which Yuanta Securities Korea acquired in 2014. He also served as head of securities investment in Samsung Life Insurance and equity investment head at Prudential Asset Management, which was merged into Hanwha Asset Management in 2010. Huh served as co-head of Seoul-based Tempis Investment Advisory in 2011.

POBA manages 19 trillion won in assets as of the end-2021 as a retirement pension fund for more than 300,000 provincial government employees. Alternative investment reaches 17 trillion won, in which overseas private debt, real estate and infrastructure account for 35.3%, 15.9% and 11.4%, respectively, according to The Korea Economic Daily's Asset Owners Report. 

The following is an edited transcript of the interview with Huh.

▲How do you evaluate POBA’s investment portfolio, compared with DB Insurance, where you were previously?

"POBA has fewer regulations on investment activities than insurers do -- insurance companies have risk-based capital (RBC) requirements and restrictions on high-risk asset investments. In terms of portfolio structure, POBA has increased alternative assets, focusing on real estate and private credit, and reduced securities such as equity and bonds. This has made POBA’s investment more stable, decreasing asset value volatility risk during a market crisis."

▲How do you forecast the alternative investment market for this year amid interest rate hikes and sluggish stocks? 

"Alternative assets have low volatility in the short term; however, they are linked to the equity and bond markets in long term. Therefore, alternative investment is affected by trends in the public market. For example, an increased lending rate at a time of real estate refinancing slashes distribution to equity investors. Also, private equity investment with acquisition financing doesn't generate a high return when interest costs rise."

▲How do you plan to rebalance POBA’s investment portfolio?

"We are focusing on stable investment to offer retirement savings to Korean public officials. Therefore, we are planning to expand assets that provide steady income gains such as equity dividends, interest income and rental income. Also, we are considering increasing exposure to private equity and real assets to expand long-term returns."

"In addition, we might consider investing in private bonds this year in pursuit of an absolute rate.  Until last year, that asset class hadn’t been our investment target due to the low rate."

▲What is the proportion of assets for income gain in POBA’s investment portfolio? 

The assets for income gain account for around 60% of our investment portfolio. The remaining 40% of assets are for capital gains, which is earned on the sale of assets with increased value. We are considering raising the income gain asset proportion to more than 70% to secure cash flow even during a market crisis. 

▲What are the upcoming changes in exposure to real assets?

"Real assets, including real estate and infrastructure, account for 38% of our investment portfolio. The increased value of real estate boosted return on investment, but we are considering reducing the real estate proportion in the mid-to-long term. The global real estate market had definitely been overheated up until last year. When I meet our staff these days, I say, “the liquidity punchbowl is empty now -- the party is over. It's time to strengthen risk management.” On the other hand, we plan to increase exposure to infrastructure as it has more stability."

▲What are the upcoming changes in private equity investment?

"We have invested in a wide range of underlying assets via private equity blind pool funds. Until last year, we had made great performances via initial public offerings. Asset management firms also say the private equity market had less volatility while the public equity and bond markets experienced a downturn in recent months."   

"But we are not planning to aggressively increase private equity investment this year. Its proportion will stand at 9-10% of our portfolio due to some commitments we have made."  

▲What is your focus on private equity investment?

"POBA has to focus on stable assets for steady cash flow. On the other hand, we need a proper level of private equity investment to support future profitability. So, we are looking for high-return investment opportunities in partnerships with private equity managers and venture capital firms for various investment channels including co-investments." 

▲More institutional investors are interested in private credit these days. Why is private credit becoming attractive?

"Private credit covers a wide range of financial products such as acquisition financing, direct lending to corporates, structured bonds with real assets as underlying investments and corporate bonds. They are attractive due to higher profitability and a better diversification effect, compared with public bonds." 

▲Some market insiders expect that more investors will bet on rebounds from low asset prices. What is your opinion?

"I think the majority of private equity managers take falling asset prices as opportunities. Some funds with vintages of 2007-2008, the global financial crisis period, have achieved great performances. Some general partners (GPs), which made capital calls in the first quarter of 2020, the early stage of COVID-19, are seeing great gains now. Some local prime offices we bet on before COVID-19 are also generating significant returns on equity."

"Likewise, institutional investors with a vast amount of dry powder could post high returns in the future. A number of GPs will continue to prefer a market freeze, and you should invest in growth sectors in the long term when the market is in a deep correction."

▲How does POBA prepare for changes in the alternative investment market?

"We have low concentration risk via investment in diversified funds. Also, we are focusing on monitoring the assets for preemptive action, such as catching timing for exits before liquidity plunges. Fortunately, we are able to better prepare for the monitoring activities including overseas real estate due diligence, thanks to the quarantine exemption in Korea and other countries."

Write to Tae-Ho Lee and Chae-Yeon Kim at thlee@hankyung.com
Jihyun Kim edited this article.