The annnouncement that Korea Investment Corporation (KIC) had teamed up with the National Agricultural Cooperation Federation to create a private equity co-investment joint venture could well be a sign of things to come.

The $157.3 billion sovereign wealth fund said it had allied with its state-affiliated agriculture services, banking and insurance-providing peer on July 17,  after the two signed a memorandum of understanding to explore overseas investment opportunities in May 2019. KIC said in a press release that the JV “consists of contributions of $300 million from KIC and $100 million from the NACF”.

“KIC and the NACF had agreed to lay out the groundwork for investment procedures, investment targets and private equity deals,” the release added.

A Seoul-based investment adviser who has worked with local asset owners argued that the establishment of a proper JV between two Korean entities has broken new ground in terms of cooperation between state-linked investors in the country.  

“The special announcement between KIC and NACF was somewhat unique because it was the first such JV in Korea,” he said, adding: “This JV structure is unique because it means KIC can hold hands with local players – but it can’t take any insurance money.”

A KIC spokesman did not respond to questions sent by AsianInvestor.

SEEKING BETTER RETURNS

While KIC has not done a formal JV with local asset owners before, it has collaborated with some as part of its remit to better spread its experience and knowledge to other state players.

“They’ve done similar investment collaboration/alliances with other Korean sovereign players such as an infrastructure investment collaboration with Korea Post in February 2019, an overseas investment MOU with Korea Teachers Fund and an alternative investment alliance with MMAA (the Military Mutual Aid Association) in 2015,” said a Hong Kong-based investment expert who has worked with Korean asset owners.

Indeed, the government sees part of the sovereign wealth fund’s mandate as being to not solely invest state funds but spread its investing experience to other players. The Seoul-based adviser said some government officials believed the fund had not been proactive enough in doing so, despite the previous tie-ups.

“KIC has been under pressure for not doing enough to help Korean players advance and develop their skillsets in terms of overseas investments,” he said, adding: “the NACF is on a learning curve, it wants a knowledge transfer and KIC is … holding its hand.”  

The Hong Kong expert said KIC could gain other benefits too. “They’re aiming various synergy effects from the JV such as the expansion of co-investment opportunities and fee reduction, especially in alternative investment space. As one of the major sovereign funds, KIC has exchanged this kind of information sharing to support the overseas investment developments of other local sovereign funds.”

The desire of local state investors to team up with KIC makes sense. The sovereign wealth fund reported a credible annual return of 5.55% in 2019 and a 4.6% annualised return since inception in 2005; that’s not bad for a country where the local 10-year government bond only offers a yield of 1.339%.

It did so in part by investing 15.6% or $24.5 billion of its portfolio in alternative assets, and it aims to keep doing more. Returns on its private equity and real estate investments have been an annualised 8.09% and 8.05%, respectively, since inception.

The ability of KIC to source such alternative returns is particularly appealing at a time when many Korean investors are turning to offshore private equity, real estate and infrastructure.

OTHER ALLIANCES

Other investors from the country have pursued their own tie-ups to improve their capabilities too. The progressive Public Officials Benefit Association (Poba) signed up a property investment JV with Denmark’s PFA in October 2019, while the year before it launched $400 million joint ventures with California State Teachers’ Retirement System (CalSTRS) and Teacher Retirement System of Texas (TRS), respectively.

KIC’s use of a domestic JV suggests there is a mounting desire to ensure state investors gain more inhouse experience and investing expertise of alternatives and offshore investing. This need has only been underlined by new reports that KIC and some pension funds have begun relaxing their physical meeting and on-site due diligence criteria for new deals, in an effort to ensure more external alternatives mandates can be struck despite travel bans amid the Covid-19 pandemic.

The Hong Kong investment expert argued other sovereign investors in Korea will likely seek to tie up with KIC for similar JVs.

“Since KIC is one of the major asset owners that has well-developed overseas investment capabilities and resources from their investment track records, its role within sovereign institutions will be increased by exchanging these kinds of alliance and collaboration,” she said.

“As many of asset owners have been experiencing access issues and the lack of relationship with GPs (general partners) for alternative investments, the collaboration in this area would be the priority going forward and it will not be limited only to alternative investments.”

Of course, it would arguably be simpler for KIC to simply receive funds from state investors and invest them on their behalf, much as China’s National Social Security Fund does on behalf of provincial pension funds.

However, under current regulations KIC is only allowed to directly accept money from any state institutions other than the Ministry of Finance, Bank of Korea and possibly the National Pension Service (NPS).

The Seoul-based adviser believes it is possible this could change.

“As a quasi-public entity it is possible KIC could more actively get more money from other local investors, if the government changes the regulations,” he noted.

Another area where more asset owner JVs look likely is in Korea’s life insurance market. Local players in the country are struggling to cope with meeting promised policy returns at a time of super-low interest rates and incoming capital rules changes. That is leading many to seek out better offshore returns, and some of these could be through JVs with international players.

“There have been JVs with several overseas asset manager arms of insurers in previous years and we could see more,” the Seoul adviser said. “Korean insurers tend to prefer asset managers that have an insurer parent company insurance money they get money from because they can frame it as being likeminded money in terms of liability investment.”