South Korea's Public Officials Benefit Association (Poba), a $10 billion state pension fund, will add $200 million to its $500 million in private debt assets as it further expands its large alternatives portfolio.
On Monday the fund invited bids from asset managers and will select four firms – two domestic and two foreign – to run the portfolios, with each pair receiving $100 million. The submission deadline is July 7, and Poba plans to make the decisions by the end of the month, chief investment officer Jang Dong-hun told AsianInvestor.
The institution made its first moves into private debt via pooled funds in 2013, he noted, and now feels it is time for its first segregated account in the asset class.
Countering the J-curve
“Now we need to compliment our strategy by committing to separate managed accounts to overcome the J-curve effect [experienced by the pooled private funds],” he said.
He was referring to the fact that private-market funds often post negative returns for the first few years, as they include capital drawdowns and an investment portfolio that has yet to mature.
The separate accounts should be able to provide cash-on-cash return immediately, said Jang.
Poba will complete its final selection in the second half of July and then conduct due diligence, before negotiating terms and conditions, he said. “We expect that the investment will start in early 2018 or if it goes particularly well, by the end of this year.”
The target for the mandate is to generate dividend yield cash-on-cash return of 6-7% and total net internal rate of return by liquidation around 8%.
Poba is fairly flexible about the assets that managers can allocate to, said Jang. “They can combine unitranche and second lien [debt] or other investment ideas to achieve the target.” Unitranche combines senior and subordinated debt into one instrument, while second lien is a form of subordinated debt.
Private market preference
Korean institutions such as Poba and Korean Teachers Credit Union said this month they are attracted to private debt because public and private equity valuations are high and bond yields are low.
That said, last month Poba chose seven more PE managers to run another $300 million between them, and plans to award larger, separate-account mandates for real estate later this year.
The fund has around 50% of its total AUM in alternative assets, noted Jang, with almost nothing in traditional fixed income, because the latter does not provide sufficient yield right now. The fund recently took profit on its public equity allocation and is waiting to see prices fall to reach a more attractive entry point, he noted.
*This article has been updated