Five years ago, Thailand’s Government Pension Fund had 5% in alternative investments. Today that allocation has almost tripled, and it is likely to rise further still as GPF considers opportunities to partner up with its global peers.

“Every pension fund should be specialised in their own market, and when they want to invest in alternatives in another market they co-invest with other pension funds so they share expertise,” Man Juttijudata, assistant secretary, risk management group of the civil servants pension fund told AsianInvestor.

Man Juttijudata
Man Juttijudata, GPF

GPF's allocation to alternative assets stood at 13% of its Bt418.5 billion ($13.4 billion) investment portfolio at the end of September 2019. However, it could end up raising its alternatives allocation to nearly 20%.

It's a logical step for it to seek to raise this amount, at least in part, by making alliances to source co-investments. Thailand has a rapidly aging population and it will soon need to pay out mounting retirement benefits. Therefore the pension fund needs to maximise long term investment returns, to raise its assets under management. 

Alternative assets offer a particularly lucrative option. Man noted the average annual returns of global private equity investments range from mid-teens to up to 20%, while that of real estate and infrastructure sits between 10% and 15%. That compares to GPF's inflation-adjusted target return target of around 2%.

While alternatives can offer good returns, they are also costly. Man noted that private equity or real estate funds run by general partners typically charge a 2% management fee and 20% of performance-driven carried interest.

Those high charges have made co-investing gradually more popular among pension funds.

“When we discussed with other pension funds, the trend is to do co-investments among ourselves,” he said. “We want to save our costs in investing in alternative asset classes abroad, like if we want to invest in Canada, we can co-invest with a Canadian one.”

GPF isn’t the only one looking to make allies across borders to co-invest in alternative assets. On 16 January Korea’s Public Officials Benefit Association (Poba) and California State Teachers’ Retirement System agreed to set up a $312.5 million joint venture into US multifamily residential real estate equities.

And the preference of pension funds to co-invest in private equity rose from 40% in 2014 to 42% last year, according to alternative data specialist Preqin.

GROWING EXPERTISE

While GPF is interested in pursuing global co-investment partnerships, its plans to do so are still in the works. Man said the biggest concern to date have been discrepancies between its asset size and that of bigger pension funds in other countries.

“Even if we join them with a 5% allocation to alternative investments, our commitment is not that significant,” he said, without elaborating on what sort of allocation it would like to secure. 

However, if other pension funds were to invest in Thailand, Man said GPF would be the one to manage the assets on the ground.

Man noted that it is well placed to do so, thanks to it having raised internal resources and knowledge as it has expanded its alternatives investing over the past five years. It now has plenty of experience in everything from assessing advisers for allocation construction to selecting general partners whose funds they want to invest in.

“We hire boutique [GP] fund managers to invest in medium and small size projects [globally], which have reasonable returns,” he said.

GPF is also considering adding another two members to the alternative investments team to look after allocations to global GPs, which will further strengthen its ability to invest offshore. While the exact timing of that buildout is unclear, it would also potentially benefit its plan to co-invest with other pension funds.

The pension fund’s alternative investments team currently houses five members. They look after its offshore alternatives investments, which accounts for 39% of its total allocation to assets such as global real estate, private equity and infrastructure. In addition, some members cover its investments in domestic real estate, overseeing the acquisition, due diligence, cash flow projection and analysis of local projects.

Last calendar year GPF’s investment returns surged to 5.7%, up from 0.2% in 2018. That marked its second-best performing year in the past five years.