Office buildings in Amsterdam and Vienna. An office complex west of Paris. Real estate loans for a Silicon Valley office complex and hotels in Nashville. All are recent examples of alternatives investments that sit in the hands of Korean asset owners (or soon will).
In recent years institutional investors from the country have collaborated with local asset managers and securities companies to source overseas alternatives investments for themselves.
The securities companies begin the process, finding assets and taking advantage of their relatively short execution time to acquire them. They then sell them to the institutional investors and gain a finder’s fee, while asset managers act as an operating partner, managing the asset.
The model is designed to help Korean institutional investors source the alternative assets they increasingly crave, while overcoming the tedious and lengthy decision-making and execution processes they have to go through in order to buy such assets.
The top seven or eight largest securities companies in Korea are supplying the asset procurement service, to varying degrees. “It’s more a question how big the business model is for each of them,” said a Hong Kong-based adviser who works with Korean institutional investors.
It’s also a growing business. As Korean investors assets under management continue to grow, they are deploying larger amounts of capital overseas, particularly in real estate debt and equity markets.
A senior investment manager estimated to AsianInvestor that Korean securities companies have done $10 billion-worth of investments for real estate and infrastructure alone over the past three years. Another said $5 billion has taken place in 2019 to date, as the model has taken off.
The model has helped Korean institutional investors and particularly insurers to reach their targeted allocation to overseas alternatives.
The rise of the Korean model is a result of two main catalysts: the desire of institutional investors for alternative assets and the interest of securities companies in growing their balance sheets.
In 2016 the financial regulator in Korean transformed the prudential framework on the securities industry from a net capital ration (NCR) regime to a revised regime that combines a new NCR with leverage regulation. That enabled local securities companies to grow their balance sheets.
“The government has encouraged us to develop our total assets to a bigger size so we can compete with the bigger securities players in the global market,” said a senior investment manager at Korean securities company working on alternatives acquisitions, under condition of anonymity.
Those bigger balance sheets allow Korean securities companies to acquire assets such as real estate, which require more capital.
In essence, this is how it typically works: the securities companies secure offshore assets and then hold them on their balance sheets for between three and six months. That gives a slower-moving asset manager time to conduct due diligence on the asset and set up a fund vehicle, such as tax-efficient onshore real estate fund (REF) or real estate investment trust (Reit) structures, for which it will act as the operating partner.
The securities company offers the asset to Korean institutional investors that are brought in as asset owners when the asset is transferred to the vehicle. The securities company and the asset manager take a sourcing fee, and the latter injecting some of its own capital into the investment vehicle too. Typically, three to 10 institutional investors participate in the fund, which has an investment period of five to seven years.
“Each investor has their own timeline, each investor has their own investment committee position, each investor has their own appetite. We can buy them some time to syndicate the deal and reach an agreement together with the asset manager,” said the senior securities company investment manager.
The securities companies use balance sheet cash, and to a lesser extent publicly-issued bonds, to acquire assets and then syndicate it to a group of institutional investors. To minimise their risk by diversifying their investments, Korean asset owners often club together in a single deal with followingly smaller shares for each of these stakeholders.
APING INTERNATIONAL IDEAS
The Korean model isn’t entirely unique. Some international securities firms such as the securities arms of Goldman Sachs and JP Morgan use their balance sheets to acquire assets, before selling down either part or the entirety of them to other investors.
But global securities firms typically focus on debt instruments. In contrast, Korean securities companies also purchase the equity side, particularly in the real estate space, which is Korean institutional investors’ most popular overseas alternatives asset type.
The asset sourcing model focuses on real estate but it has also been used to acquire equity and debt in infrastructure, private equity, hedge funds and real assets such as aircrafts. Executives in securities companies and investment advisers estimated that 50% of these investments have been sourced from Europe, 40% have come from the US, with the remaining 10% being bought elsewhere in the world.
Commercial real estate have been the most popular assets for Korean brokers, particularly overseas real esate equity. Real Capital Analytics, a data provider tracking commercial real estate deals, said there were $9.1 billion of real estate acquisitions involving a Korean securities company in the US and Europe between 2016 and 2018.
This story was adapted from a feature on Korea's brokers acting as real estate intermediaries in AsianInvestor Summer 2019 edition.