DGB Life Insurance, a mid-sized insurer in Korea, is planning to increase its alternatives allocation up to a range of 8%-10% this year, particularly in private equity and private debt in overseas markets.
The lifer, which has about $6 billion in assets under management, plans to ramp up its alternative exposure from the current 5%, Jeong Seung-Ki, a manager in the alternative division of DGB Life Insurance, told AsianInvestor.
“The pressure to increase returns is growing for many reasons. To create the level of money you have to offer to your [policy-holders], it's not easy with risk-free government bonds… That's why we need to expand our alternative investment even more,” Jeong said during an interview session at the Global Alternatives Week: Korea online event hosted by AsianInvestor last week. The 10-year Korean government bond yield stood at 1.8% on Monday (February 1).
Its investment direction is in line with many global asset owners, which have been increasing their allocation to alternatives in the current low-interest-rate environment. Korea Investment Corporation (KIC) said it plans to increase its allocation to alternatives in the coming six years to at least 25% of its portfolio.
Jeong did not specify DGB's current breakdown of alternative assets, but said the life insurer is now looking for opportunities particularly in equity and credit in private markets.
Many sectors have been hit hard by lockdowns and worsening consumer sentiment, but the stock market is faring well, and private equity is related to stock investments, he said. The net asset values of most private debt funds are also recovering slowly after falling into negative territory previously.
“I think buyouts are an attractive investment. From the same perspective, investments in growth capital and even venture capital are attractive,” Jeong said. A buyout is the acquisition of a controlling interest in a company, often by a private equity fund.
“In 2021, we will actively review these investments. And I will choose the appropriate investment [according to] the company's situation at the time of the investment… private equity investment has not been executed yet. Private debt investments have been carried out.” he said.
Jeong had said the lifer would increase exposure to distressed debt, a type of private credit that invests in corporates with financial distresses, in May last year. That said, the uncertain accounting treatment of non-performing loans under the upcoming K-Insurance Capital Standards (K-ICS) regulations is affecting the pace of its investments in such assets.
DGB Life also said it prefers to invest in foreign matured markets with more vibrant opportunities.
“Basically, I think mergers & acquisitions are not active in the Korean capital market yet…There are many reasons, but I think the biggest reason is the difference in economic size,” he said. This is despite some beliefs that the Korean M&A market is heating up amid the pandemic.
“If you have enough transactionable assets, you'll be able to pick out the assets you like. However, I don't think there are many opportunities like this in the Korean market so far…Compared to the US, Korea will inevitably have a small number of companies that can be traded,” he added.
Most big asset owners in Korea are aggressively lifting their overseas exposure National Pension Service (NPS) has stated that it aims to increase overseas investments to around 55% by 2025 and has recently restructured its overseas investment team.
This does not mean that DGB Life has ruled out the domestic market, but that it is aware of the market's limitations, Jeong said. Any investors would invest in a more mature market, he said.
In terms of favoured sectors, Jeong said the insurer is targeting companies with dominant positions in sectors like e-commerce, rather than technology firms which are leading rallies in most developed stock markets.
“We don't prefer the growing high-tech sector. It is difficult to predict [the valuation] and even if it was predicted, it is even more difficult to predict whether the performance will continue until the maturity of the fund,” he said.