South Korean institutions have been among Asia’s most assertive allocators to alternative assets, and their appetite shows no sign of waning, with demand rising for offshore real estate in particular.
Speaking at AsianInvestor’s 11th Annual Korea Institutional Investment Forum late last month, chief investment officers said they intended to keep adding to their alternatives exposure to help sate their hunger for yield.
Suh Won-Cheol, head of alternative investments at Government Employees Pension Service (Geps), said W1 trillion ($865 million) of the fund’s W8.7 trillion was in alternatives. It plans to raise this 15% allocation to 21% over the next three years, he told the audience.
As with many Korean asset owners, Geps has leaned increasingly heavily on foreign exposure to boost returns. In the alternatives space, 60% of its investments are offshore, up from nearly zero a few years ago.
Almost half (47%) of Geps’s alternative investments are in property, 31% in private equity or private debt, and the remaining 22% in infrastructure-linked investments, said Suh. Of these, offshore real estate is set to see more flows.
One-fifth (22%) of Geps’s alternatives portfolio is in foreign property, and that figure is rising, he noted. The fund has sought such assets for their stable dividends rather than for capital gains, he added.
“Assets that create dividends are important for us, and low [interest] rates and leverage are also important,” said Suh. “Especially in Europe, you don’t need to increase market risk while raising dividends at the same time.”
Minjun Kim, deputy director of the private markets group at Korea Investment Corporation (KIC), said alternatives comprised 17.7% of the sovereign wealth fund’s total AUM in late 2016, up from 13.7% at the start of the year. Most of the additional flows went into real estate and infrastructure assets.
KIC had $110.8 billion under management in December 2016, up from $84 billion the year before, according to AsianInvestor’s AI300 ranking. Since the fund is targeting AUM of $200 billion by 2020, an alternatives allocation of 20% would by then give it $40 billion in the asset class, around double the current amount.
Likewise, Hyundai Marine & Fire Insurance has been aggressively building its alternatives allocation. The firm only began investing into real estate in 2011 and infrastructure in 2015, yet alternatives now account for W6 trillion of AUM or $5.12 billion of its $26.35 billion AUM, W1.2 trillion of which is in international investments, said Jeon Kyung-Cheol, general manager of alternative investments.
Hyundai has increased its real estate exposure by W600 billion, said Jeon, without providing a time frame, and the next increases will be in infrastructure equity and debt. The insurer’s commitments to private debt are also on the rise, he noted.
Some of these investments will be outsourced in blind funds, Jeon added, and Hyundai will also look at co-investing.
Geps’s Suh said his fund was also looking to gradually allocating more to private equity and private debt, via blind funds, though not as much as into property.
Despite alternatives’ appealing yield potential, the speakers cited several considerations to be taken into account, particularly for long-term real estate investing.
Suh said certain markets offered tax benefits for foreign investors. “We will also look at demographic changes, such as increasing populations and jobs and the potential for real estate values to rise in certain regions, and the level of returns such investments offer beyond Treasuries.”
Meanwhile, Hyundai Marine & Fire Insurance’s Jeon cited as a concern the ‘J-curve’ effect in private equity, whereby PE fund returns tend to be negative initially as the assets are invested. The firm has sought to minimise the impact of this by investing in growth and secondary strategies, he said.
In a similar move, Korea’s Public Officials Benefit Association is allocating $200 million to segregated private debt mandates with a view to countering the J-curve effect coming from the private market funds it had already invested in.
Lack of hedge fund interest?
Private markets may be all the rage, but none of the asset owners seemed keen to discuss their interest in making commitments to hedge funds.
That’s understandable, said Yang Bong-Jin, head of global investment strategy at Korea Investment Management, also speaking on the panel. “Over the last three years hedge fund investments have not had good results, which has worried the industry and led some institutional investors to withdraw.”
However, Yang believes it is possible that a shift in macroeconomic conditions and some slow withdrawal of global monetary liquidity might lead this to change.
“We have had an overabundance of liquidity, which has reduced volatility and wound down opportunities for hedge funds,” he noted. “But now there are signs of recovery, and investors could see hedge funds as a new tool for diversification.”
However, none of the asset owners on stage voiced support for this view.
This article is based on real-time translation from Korean.