Korean LPs seek private equity secondaries amid liquidity crunch

Secondary strategy is South Korean institutional investors’ top pick for private equity investments for two straight years, a survey showed. Management buy-in, an external shareholder’s acquisition with replacement of existing management, is still an important strategy for Korean limited partners (LPs), the survey found.

Healthcare remained Korean investors’ favorite sector for two consecutive years. Tech, driven by the artificial intelligence boom, came back as the LPs’ top pick since 2022.

The Korea Economic Daily conducted the survey in December 2023. A total of 15 institutional investors – five pension funds, three mutual aid associations and seven insurers – responded with their asset allocation plans, general partner (GP) selection standards and market outlook.

The 15 institutions are estimated to manage more than 2.12 quadrillion won ($1.59 trillion) in assets as of the end of 2023, with 20.7% for alternative investments. Overseas assets make up about 65% of their alternative investments.

Some Korean LPs see global private equity markets need further corrections, the survey showed. One-third of the polled LPs said private equity is overvalued, while 40% and 20% responded it is fairly priced and undervalued, respectively.

About 40% of the surveyed institutions plan to increase their exposure to private equity. The percentage is similar to last year, but lower than 61.5% in early 2022 when private stock was bullish.

Some 26.7% will hold the current exposure. One-third of the LPs are yet to confirm their plans or didn’t respond. No surveyed LPs said they will cut the current exposure.

About 40% of the polled LPs plan to invest in four or more new private equity funds this year. Some 13.3% will tap a fund or two, respectively. The remaining are yet to confirm their plan or didn’t respond.

Healthcare and tech, which underwent significant corrections last year, topped Korean LPs’ preferred sectors like the survey results in early 2022.

Healthcare, which received a third of the polled LPs’ choices, ranked top sector for three consecutive years. Tech, buoyed by generative AI boom led by ChatGPT, was picked by the LPs as their favorite sector. No respondents plan to cut their exposure to the two hottest industries.

Financial services ranked third with 20% of the LPs’ choices. One-fifth of the surveyed LPs will decrease their exposure to the consumer and retail sector, the survey found.
The secondary market for private equity, which peaked at a record of more than $130 billion in 2021, may have a resurgence to a record-high level in 2024 due to dry powder estimated at $220 billion, according to Cambridge Associates’ private market outlook.

This prediction is similar to the survey results. Secondary, which seeks faster returns amid liquidity crunch, remained the Korean LPs’ most sought-after private equity strategy for two straight years.

Management buy-in, which occurs when an external stakeholder takes a majority stake in a company to control management, ranked second. It was picked by 40% of the polled LPs, down from 60% last year.

Co-investment, which involves a fund commitment from LPs and asset managers together based on their strong partnership, received a third of the polled institutions’ choices, down from 50% last year. 

A decline in global venture capital and growth capital was reflected in the Korean LPs’ investment plan. No institutions said they will increase VC investments; one-third will cut their exposure. For growth capital, only 6.7% of the LPs plan to expand the current exposure.

North America remained the most popular destination for Korean LPs’ private equity investments. About half of those polled will spur their private equity investment in the region, followed by 20% for Europe.

Asia is the last on their list – one third of the surveyed LPs will decrease their private equity investments in Asia. Only 6.7% will increase the current exposure.

By type of vehicles, blind pool fund remains Korean LPs’ top choice. Allowed for maximum of two choices, the blind pool fund received votes from 12 investors, followed by five for co-investment and separate account, respectively. Listed private equity received one vote.

To view the detailed responses of each institution on their alternative asset allocation and fund manager selection, please see the Asset Owners Report.

The 15 surveyed institutions are as follows:

Public pensions and SWF

National Pension Service
Korea Investment Corporation
Government Employees Pension Service
Teachers' Pension
Korea Post (savings)

Mutual aid associations

Military Mutual Aid Association
Korean Federation of Community Credit Cooperatives
The Korean Teachers' Credit Union

Insurers

Kyobo Life Insurance
Samsung Life Insurance
Samsung Fire & Marine Insurance
Shinhan Life Insurance
Hanwha Life
ABL Life Insurance
KB Insurance

Write to Jihyun Kim at snowy@hankyung.com
Jennifer Nicholson-Breen edited this article.