Korean asset owners eye Africa potential

Faced with low yields at home and a need for diversification, Korean institutions are taking a fund of funds approach in Africa and are making plans for direct investment.
Korean asset owners eye Africa potential

Korean asset owners are making fledgling investments into frontier markets such as Africa driven by low growth prospects at home and an urgent need for diversification, a forum heard.

Jeung Jae-Ho, chief investment officer at the $35 billion Korean Federation of Community Credit Cooperatives (KFCC), says his organisation is aiming to raise overseas investment from 5-10% by next year.

While it does not invest in Africa at present, he says KFCC is studying this. Initially, it is likely to take an indirect fund of funds approach.

However, he revealed at last week’s Africa Investment Summit hosted by AsianInvestor and sister title FinanceAsia, that it planned to invest in a partnership with a technology company to capitalise on potential growth in consumer credit.

“We are now talking about investment with a high-tech solutions provider,” he said, explaining it is the same strategy that it started employing in Laos and Myanmar. “We are preparing an African investment as we have done in the Asia market.”

Similarly, Kim Joong-Il, CIO of the Specific Post Office Service Agency, a subsidiary of Korea Post, noted that it already had some fund of funds exposure to Africa, with a visit to the continent planned for next year.

The institution has 5% of its portfolio invested overseas, which it is seeking to increase to 8-10% over time. Of its overseas bucket, 35% is in emerging markets, 35% in the US, 25% in Europe and just 5% in other markets including Africa.

Of these weightings, it will seek to increase in Europe and other markets in particular. He noted that all Korean institutions were finding its difficult to source yield in Korea and as a domestically focused market there was a need to diversify.

He said he would be looking for research on various African countries, and stressed that political stability was a key factor. But the institution does plan to make direct investments step by step, mentioning Nigeria, Kenya and South Africa by name.

On the organisation’s selection criteria for its fund of funds approach, Kim noted that its priorities were return, counterparty trust and size of assets. Generally when it chooses a partner it picks from a preselected list.

Jeung noted that KFCC would also look to take a fund of funds approach initially. He added that to invest directly into Africa would take time and would require greater research on the various markets and reliable credit ratings.

Asked why it had not invested in Africa so far, Jeung explained that Korean institutions are largely conservative and domestically focused. There is also reticence from the foreign exchange crisis of 2008, when the won depreciated up to 60% against the US dollar, causing huge losses.

However, he noted that growth and bond yields were now low in Korea, forcing investors to look further afield. “If you want high returns you are supposed to go to a frontier market like Africa,” Jeung told the conference, noting that KFCC’s target return is a modest 5-7%.

“But this is far away for us to control our assets. We are considering investing and we are studying. Most Korean institutions are preparing African investment. We talk to each other frequently [about it]. But it takes time.”

Asked how it might look to invest on the African growth story, Jeung said initially it was likely to be indirect via fund of funds. “We need research papers, credit ratings and payment guarantees, then perhaps we could start [direct investments].”

Asked if there were sectors other than banking it would look at in Africa, Jeung mentioned that natural resources and telecoms were being talked up in the media.

To an audience question on how it might evaluate equity opportunities in Africa, he stressed that KFCC favoured preferred stock over common stock. “Usually we invest on a mezzanine basis. We want a stable income, rather than a high return.”

He added that the private equity sector was growing in Korea, and that there might be some interesting private equity opportunities in Africa.

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