Korea’s Public Officials Benefit Association (Poba) is planning to team up with more overseas asset owners to make alternative investments in order to counter the limiting impact of the Covid-19 pandemic. And other asset owners in the country look increasingly likely to pursue a similar strategy.
“Poba would like to do more co-investments with currently existing partners....and [potential] new partners,” Jang Dong-Hun, chief investment officer of the W14.3 trillion ($12.28 billion) pension fund, told AsianInvestor.
Covid-19 is one reason behind this aim, but Jang said he is looking to do so because the management fees on co-investments are lower than investing through private equity or infrastructure funds, making them more efficient and economical.
“If we independently choose external GPs (general partners) on our own, we don’t have that much resources…. If our partners in co-investment can do the due diligence, or if they are very familiar with the external GPs in the local market, so that case we have more confidence,” said Jang.
Poba is looking to increase its exposure to real assets, which currently take up about 40% of its portfolio, to protect their portfolios against the negative impact of the coronavirus pandemic. The pension fund has about 55% in alternatives, a broader asset class that includes real assets along with listed infrastructure, commodities, among others.
Co-investments typically consist of multiple asset owners joining hands to source and invest into an asset or portfolio of assets, and then appointing a general partner (GP) or sponsor to help manage them. In some cases the GP offers the investment opportunities to the LPs and commits capital to the deals too, via its funds. Since the LPs assume higher risks in co-investment deals than they would if investing into a GP fund, the management fees they pay to GPs are much lower.
“Co-investing with other like-minded investors would have many benefits in addition to information sharing. As they co-invest, they can rely on each other in terms of due diligence as their interest is aligned. For example, a handful of investors in Korea have done this already with public pensions in the US," Andrew Shin, head of investments for Korea at Willis Towers Watson, told AsianInvestor.
Indeed, Poba has already done so, several times. It agreed with California State Teachers’ Retirement System (Calstrs) on January 16 to set up a $312.5 million joint venture (JV) into equities in US multifamily residential real estate.
The Korean pension fund and Danish pension fund PFA had previously announced in December 2019 the purchase of a €1.2 billion ($1.3 billion) portfolio on Europe’s real estate markets. The portfolio was bought in collaboration with German real estate investment manager Patrizia. PFA took up 55% of the equity with DKK2.6 billion ($385 million), Poba took 10% with €120 million and a Patrizia fund vehicle acquired the remaining 35%.
In 2018, the public pension scheme launched $400 million joint ventures with Calstrs and Teacher Retirement System of Texas (TRS), respectively to invest in US real estate debt. Poba committed $200 million to each JV. In May the following year, it doubled its investment with Calstrs.
ADAPTING TO COVID
Korean asset owners have been increasing their exposure to alternative assets in an effort to diversify their portfolios and offset the extremely low returns to be found in domestic government debt. The 30-year Korean government bond yield is only 1.6% now, Shin said.
It is a trend that has slowed amid the difficulties posed by Covid-19, which include an inability of foreign GPs to conduct physical meetings with Korean investment teams and a difficulty of conducting due diligence on potential assets.
As a result, Poba and local institutional investors have focused largely on domestic deals. That said, although due diligence on foreign private deals, including on-site inspections on real estate and infrastructure projects, can’t be conducted because of the lockdown, Korean asset owners are adapting to it by revising their internal guidelines, Shin said.
However, if travel restrictions as a result of the pandemic continue to last well into 2021, it is likely that Korean asset owners will find ways to deploy capital overseas. They may team up with other limited partners in Europe and the US and co-invest in private deals, so they can share information, Shin said.
Other ways to ease international alternative investments could include asset owners conducting Zoom meetings and granting conditional approvals on the deals, meaning investors may give initial approvals on the investment projects and complete the due diligence procedures later when the pandemic cools down, he added.
But potential risks are looming as a result of Covid-19 too. Central banks around the world have lowered interest rates and injected liquidity into the markets, which has helped to insulate the financial markets from the economic woes inflicted by the pandemic.
However, asset owners are increasingly concerned about the divergence between the financial market valuations and the performance of the real economy. Increasing numbers of small businesses may struggle to renew their loans amid a dire economy, and nobody can be certain about where this will lead to. That looks set to increase volatility outlook for capital markets sooner or later, Shin said.
It’s also a reason why investing into long-term, illiquid assets that tend to offer predictable returns look set to continue attracting asset owners.