Korea's Public Officials Benefit Association (Poba) has revealed why it awarded private equity investment mandates totaling $320 million to seven general partners (GPs) last week, as part of its efforts to diversify its investments and improve returns.

In an interview with AsianInvestor, it also indicated that it is eyeing larger, separately managed account investments into real estate in the second half of this year.

The W10 trillion ($8.92 billion) pension fund gave Apollo Management and EQT Partners $40 million apiece into buyout funds; Ares Management and Alcentra received $50 million apiece for fixed income funds; HarbourVest Partners gained $40 million for a co-investment fund; Neuberger Berman received $40 million to invest via a fund of private equity funds; and Goldman Sachs Asset Management was bestowed $40 million for a private equity secondaries fund.

Jang Dong-Hun, chief investment officer at Poba, told AsianInvestor that the successful companies were chosen from 58 general partners that applied to participate in the beauty parade. “From our perspective each of the GPs were really competent and renowned worldwide for their expertise,” he said. “It was a hard process for us [to choose the eventual winners].” 

Poba winnowed the field of applicants down initially by studying the performance of the most comparable and recently completed funds of each company. That helped them to reduce the field to a shortlist. An investment committee, comprising of executives of Poba and outside experts, then conducted interviews with the short-listed companies and each player was scored, with a 50% weighting given to their historical performances and the rest based on their presentations. 

“The first round was our basic check. For the second, our main point was ‘are they really prepared to be our partner in each area?’” Jang said.

Poba was also conscious of the need to diversify the various strengths of its investment managers.  “We were trying to compliment existing mandates and investments when choosing new GPs,” Jang said.

The winners
 
In the case of its equity winners, Jang noted that Apollo could point to a previous long-term fund internal rate of return of 24% and could offer Poba its first European buyout fund mandate. Poba has worked with Apollo before too, so it was comfortable appointing the firm—although Jang stressed that it still had to go through the same performance and presentation process. 
 
EQT, similarly, boasted a 40% IRR on the most recent comparable fund and has expertise in northern Europe. 
 
The winners of Poba’s fixed income mandates, Ares and Alcentra, offered their own strengths. 
 
“We selected Ares in part because they were a very specialised GP in the debt area and we liked their capacity in sourcing sponsored deals from debt managers,” Jang said. Added to this, he noted that it boasted a 14.9% IRR for its most recent comparable fund. 
 
Alcentra, meanwhile, brought expertise in distressed debt to the table. “We selected three GPs last year for mezzanine debt investments but wanted to get into the distressed area too,” Jang said. “Alcentra is a very specialised distressed and structuring credit fund manager and it had a strong track record, with an IRR of 18%.”
 
For co-investments, a new area for Poba, Harbourvest impressed with its strong deal-sourcing capacity, while it could point to a 13.3% IRR from the previous life of a similar fund. 
 
And in the fund of funds space Poba opted for Neuberger Berman, a manager it has dealt with before, because of a track record that consists of nine previous funds with an average gross IRR of 21%. “They possessed [many years of] experience, with nine funds using the same strategy,” Jang said. 
 
Goldman Sachs Asset Management was selected in the secondaries strategy because of the diverse array of its capabilities in this space. “We felt their capacity to execute various types of secondary strategies, compared to other competitors, was impressive” Jang said.
 
Again, GSAM was initially shortlisted because it could boast a gross IRR of 11.4% on a previous fund.

Overall, Jang said Poba was particularly focused on funds that had strategies that fitted with those of the pension fund and were committed to delivering them. Plus, it was interested in buying into funds already a year or two into their lifespans, if possible.

“We wanted where possible to avoid the J-curve effect, where private equity funds tend to suffer initial losses as they invest,” Jang said. “Other things being equal we preferred funds in the final stages of fund raising and especially those with a deal pipeline already in place.”

While Poba emphasised prior returns in its assessment, Jang said the funds won’t necessarily have to replicate their past performances — which is just as well, given the fact that more money entering private equity tends to have a dampening effect on returns.

“We are focusing on more stable cash flows, but as long as we get 5% to 6% stable annual returns with limited volatility we will be satisfied,” Jang said.

Looking to SMAs

Poba continues to receive large inflows of assets from officials saving for their pensions. Plus, it has also seen its assets under management grow due to the strong performance of some of its investments.

“We had rapid capital appreciation in the domestic and overseas markets, while our members are committing more capital into our fund, so our AUM has grown fast compared to our expectations,” Jang said.

The fund has no immediate plans to offer new mandates, but Jang says he is looking into separately managed accounts (SMAs) in real estate next, “to make it easier to facilitate investments more effectively and have more custom-tailored strategies to meet Poba’s objectives”.

A selection process for such mandates is likely to come in the second half of the year.

Jang said the sizes would be meaningful. “Usually the ticket sizes for SMAs is higher than for funds, so it’s possible the ticket sizes for each could be at least $100 million.”

AsianInvestor will hold its annual Korea Institutional Investment Forum on June 20 at the Westin Chosun in Seoul. Please visit the website for more details.