General partners (GP) need to do a better job at selling and differentiating themselves to Korean institutional investors as these grow more experienced and savvy in the private equity space.
That was one of the key concerns raised at AsianInvestor’s 12th Korea Institutional Forum on June 20 as insto executives talked about their priorities as potential limited partners (LP).
Korean capital is attracting a lot of attention from GPs in the region but all of their presentations are largely the same, Lee Jin-ho, head of global real assets at Korea Post, told the audience.
According to him, they generally start with their history, talk about their track record and comparative advantages, and then mention the fund that they happen to be raising which might be suitable for the investor. “In the beginning, when we started to meet with these people, probably that pattern did not need to change. However, we are accustomed to it now,” he said.
Korea Post has about 5% of its W120 trillion ($107.6 billion) in assets under management, with about 5% of its portfolio in alternative investments, including private equity.
For Lee and other Korean insto executives, GPs need to provide strategies that set them apart from their competitors and more clarity on whether they can actually meet an investor's needs, and retain their best personnel to provide consistency.
With most GP pitches and presentations following the same pattern, and details like history and track record largely already known to institutional investor clients, the priority for Korea Post when deciding whether to become an LP is learning about what sets one GP apart from the others.
“I would like to know what strategy they have as a differentiating factor against their competitors. That’s the one thing I would like to know,” Lee said.
Nonetheless, many GPs are unable to provide satisfactory answers.
When we meet with GPs now, we are interested in knowing their strategies, tactical approaches, and so on, and if they’re able to answer those questions then my interest continues, Lee said.
“However, after asking those questions, I found that many of them are not prepared for these questions of mine, and my attention is turned off afterwards. It’s very difficult to maintain my interest in that GP,” he said.
LP PRIORITIES AND PERSONNEL
Another priority for Korean institutional investors is the ability of GPs to actually meet the needs and requirements of investors.
“If the fund is really suitable for us, we would like to know at what point in time in this current economic cycle the realisation of that goal will be reached,” said Lee.
The GP should also provide some insight into what kind of changes we are looking at in the future cycles of economy, and how their track record can be maintained throughout, he added.
Generating consistent cash flow is key for insurance firms like Hyundai Marine & Fire Insurance, its head of alternative investments, Jeon Kyung-cheol, said.
“For us, it’s very important that there is cash flow generated on a continuous basis, so we want to work with managers that have been verified, managers that can generate income or revenue on a constant basis,” Jeon told the audience.
This ties into the third priority for Korean institutions: the consistency of the personnel responsible for delivering the performance results.
“We look at the track record of the managers, so we see if important personnel changes have occurred or not,” Jeon said.
Korea Post also looks at the personnel who are responsible for making the success stories, and whether they are continuing to work at that company or not, Lee agreed.
However, institutional investors like Korea Post are wary of the motivations of some of the more successful fund managers, with many of them being scouted by other private equity companies.
“Sometimes I am confused if they are representing us, or if they are representing their products in order to get their fees and bonuses as quickly as possible, ultimately to get scouted by other companies,” Lee said.
“If their hidden agenda is the latter, probably there is a mismatch of our interests between us and them,” he added.
Being able to meet the above demands is becoming more important given that the average allocation by Korean institutional investors into private equity investments increased to 5.7% of total assets from 4.8% between July 2017 and June 2018, according to data from Preqin.
However, for all that some Korean investors may still not necessarily invest with the bigger private equity firms due to concerns that these might not be best able to make investment decisions that make sense for LPs.
“Because they have been popular for so long, the size of the fund starts at $1 billion and becomes $2 billion in no time, and when the fund size becomes too big I doubt whether the investment will still be made in a very serious or cautious way,” Korea Post’s Lee said.
Lee actually prefers smaller fund sizes if the strategies are clear cut and have good investment opportunities, especially if the managers have prior experience with the larger firms.
“The management companies that have been established by people who used to work for the large, big-name managers, if they have good investment opportunities then we are willing to work with these smaller managers as well,” he said.
For Hyundai M&F, the size of the firm is less of a priority.
“Particular strategies are important, whether the size is big or small, so the strategies are really something that we like to have — that’s what attracts our attention,” Jeon said.
“However, having said that, we are more focused on the level of experience and the track record, rather than size,” he added.
This story is based on quotes translated from Korean at the event.