Korea’s Public Officials Benefit Association (Poba) has decided its private debt exposure into the Asian market, beyond the existing investments in US and Europe.
Poba has been having meetings with Asian private debt managers for the last two years, leading up to the decision to enter the market, Jang Dong Hun, chief investment officer at Poba, told AsianInvestor.
“At the initial stage, we were risk-averse and sceptic about the performance outlook from a risk/return perspective. After studying the Asian private debt market, we now think there are some sophisticated managers that have a decent level of experience, although not as comprehensive as in the US markets for instance.”
Poba plans to commit $250 million to five private debt funds focusing on mid-cap companies in North America and Asia. To find these, it issued a request for proposals with a deadline on September 26 at 3pm Korean time.
The pension fund will select four US-focused debt funds and one Asia-focused fund and commit around $50 million for each vehicle that will be invested in senior-secured loans through direct lending, according to Jang.
“These new mandates help us diversify our portfolio across more markets, funds and managers. Initially we have been focusing on the upper mid-market area which is bigger in size,” Jang said.
“That means we have constructed a stable debt fund portfolio. Now, we believe the mid-market is now a more eligible area from risk/return and diversification perspectives.”
Jang elaborated that the Asia market will not be the main focus for Poba’s private debt investments.
“However, we will now enter by selecting very capable GPs (general partners) in this market. It is not only with the hopes of higher returns; we would like to diversify with this new start for the private debt fund area,” he said.
REPLACING FIXED INCOME
The increase of private debt investments are fuelled by the lack of attractive fixed income investments globally. Jang explained that Poba has a strategic plan to increase fixed income-related investments. However, in the current low or negative interest rate environment around the world, Poba lacks options to find investment opportunities with the right risk/return profile.
“Through our experiences with investing in private debt funds throughout the last four to five years, we think that selective and sophisticated general partners can generate adequate returns in association with managing the [relatively higher] risk [involved in private debt],” Jang said.
He pointed out that Poba is a very conservative and risk-averse organisation. For instance, it only started to invest in private equity real estate blind funds in Asia two or three years ago. Now, the same process has been initiated for private debt.
“It is kind of the evolution for Poba to first build a portfolio in more established markets within a certain asset type, learn from these investments and then enter more emerging markets when opportunities and diversification make it attractive,” Jang said.
For private debt investments, Poba seeks to achieve just above 5% return after hedging cost and management fees. So far, the pension fund has focused on direct lending and senior secured unlevered investments within private debt fund.
“Good GP (general partner) selection is the key to achieve our return target, and the same time to mitigate the risk that we acknowledge to be present in private debt investments. However, we believe the risk is relatively lower than finding the right risk/return among fixed income products currently,” Jang said.
OPEN TO NEW MANAGERS
This year, Poba has also reupped by doubling its existing private debt investments in US and Europe, or committed to the new or latest fund vehicle in a series, with a number of its existing managers/GPs. Earlier in September, Jang told AsianInvestor in detail how that came about in one case.
“Poba is very open to working with new external managers. We look for private debt managers with expertise, a stabile investment team and a long, successful track record – preferably further back than the global financial crisis. However, we acknowledge that it might be difficult to find in Asia.”
Jang explained that Poba has a preference for getting a seat on fund managers’ advisory boards. Thus, he would appreciate the opportunity to the same in regards of these new investments.
In April, Jang also explained how Poba is seeking to tightening the control they have over their alternative investments. For now, co-investment opportunities are “less urgent” for private debt investment than other alternatives assets.
Across US and Europe, Poba currently has private debt investment worth $400 million, excluding capital uncalled by fund managers, with almost all investments made within the last four to five years.
As of end-2018, the share of total alternatives investments was 58% out of its total assets under management of W12.2 trillion ($10.2 billion). As of September 2019, its total AUM had grown to W13.5 trillion.