The numbers of leading Korean asset owners looking to bolster alternative asset positions continues to grow, with the Construction Worker Mutual Aid Association and DGB Life both seeking to ramp up their portfolio allocations by several percentage points.
Lee Wea-hwan, chief investment officer of the Construction Worker Mutual Aid Association (CWMA) that has $4 billion of assets under management, said the association is planning to change the internal regulation to allow investing in overseas assets.
As a public organisation, CWMA is one of Korea’s most regulated asset owners, and as a result it could barely implement any new overseas investments throughout 2020, Lee said in a panel discussion at AsianInvestor's Global Alternatives Week: Korea virtual event over the week of January 25.
“Starting from February, the regulation [limiting such investments] is expected to be changed,” he said. “As of January, we had 26% of our assets allocated to alternatives and plan to increase it further to 30%. In terms of investment format, most of the investment will be committed to blind-pooled funds,” he said, without specifying when CWMA intends to achieve the 30% target.
The association’s portfolio is currently managed by five investment staff, but it is planning to hire more personnel and enhance training to its existing members to increase its investment capabilities, he added.
BK Cheon, chief investment officer of DGB Life Insurance, has similar growth plans in the alternative asset space. The insurer has W7 trillion ($6.33 billion) of assets, 7% of which are in alternatives, but Cheon said he wants to gradually increase this to 15% in the medium-to-long term.
His comments complement those of Jeong Seung-Ki, a manager in the alternative division of DGB Life Insurance, who said at the same event that the insurer aims to raise its alternatives allocation to between 8% and 10% of its portfolio this year, particularly into private equity and private debt in overseas markets, as well as infrastructure investments.
The investment plans of CWMA and DGB Life sit broadly in line with those of many Korean and global asset owners, which have been raising their allocation to alternatives in the current low-interest-rate environment.
Korea Investment Corporation (KIC), for example, plans to increase its allocation to alternatives to at least 25% of its portfolio in the coming six years.
Indeed, the average asset allocation of global pension funds to private assets, which include real estate, private equity and infrastructure, has moved from about 7% to above 26% among global pension funds over a 20-year period, according to a report released by Willis Towers Watson early this month. Alternative assets have become increasingly attractive because they offer appealing returns, which has offset their illiquidity and governance difficulties, the investment consultancy noted.
DGB Life is also aiming to ramp up its alternative assets this year because it struggled to do so during 2020. Cheon noted that the physical difficulty of conducting on-site due diligence amid Covid-19 restrictions led DGB Life to invest less into alternative assets last year than it would have liked.
"It has been finding ways to solve these problems," Cheon said. That includes such the use of video calls, while also tending to prioritise general partners with solid track records, he said.
The insurer has faced other challenges in these Covid-dominated times. Cheon noted that the balance sheets of corporates have deteriorated amid shrinking demand for goods and services, suppressing investment returns. Yet at the same time market liquidity is abundant, courtesy of the largesse of central banks eager to avoid a liquidity crunch.
These circumstances have made it extremely difficult for DGB Life to ascertain the right valuation of assets, particularly when it comes to private debt, he added.
As DGB Life casts around for investment opportunities it is keeping a particularly close eye on infrastructure opportunities. The assets stand to fare relatively well following a set of regulatory changes set to impact Korean insurers over the coming few years.
The country will adopt new accounting policy IFRS-17 in 2023 and the new K-ICS capital regime in 2022. Illiquid assets such as real estate will probably receive higher risk capital charges, which will lower their effective returns and as a result reduce investment opportunities and investment capacity. In contrast, the capital charge for qualified infrastructure assets is likely to end up lower than real estate, which will increase the investment appeal of this asset class, said Cheon.
Asset owners seeking to grow their exposure to infrastructure assets are likely to favour blind-pooled fund investments over project-based investments, due to the lingering difficulties with on-site due diligence is not feasible, predicted Kevin Hur, managing director at the alternative investment division of Hanwha Asset Management.
Speaking in the same panel as Cheon and Lee, he said that infrastructure-related debt investments are likely to be more preferred than equity investment, as return will be more stable.
Both Lee of CWMA and Hur believe the bright investment spots are likely to remain similar in 2021 as last year at least until the pandemic is over. They added that even when the vaccines are broadly rolled out, there will be fundamental changes to industries and economies.
"As Covid-19 has changed our fundamentals, [the] vaccine would not [return] the world [to how] it was before Covid-19,” Hur said.
This changed environment means that alternative investments relating to digitalisation and e-commerce will remain appealing, including data centres and logistic centres. Meanwhile, smart logistics assets are promising but may be overvalued.
In addition, asset owners are likely to prioritise investment themes that can benefit from exposure to the aging societies of east Asia and the western world, such as senior housing and senior care centres, Lee said.
"Covid-19 has changed our lifestyle…What I think are promising alternatives assets are ESG, smart grid, eco-friendly [assets], contactless [businesses], data centres [and] telecommunication-related assets,” noted Hur.
He added that the telecommunication sector has huge investment needs which could present risks, and as a result it might make more sense for asset owners to gain exposure to such assets via securitised assets. Lastly, he suggested keeping an eye on assets that have become heavily distressed due to Covid but could rebound once the disease recedes, including aircraft makers and airlines and hotels.
*Josh Jeon contributed to the story by translating the comments of all three speakers, which were originally in Korean.