Why Poba doubled down on distressed assets
Jang Dong-hun is no stranger to investing in new areas of the global financial markets. As chief investment officer (CIO) of the Public Officials Benefit Association (Poba), he has overseen new external investment mandates into insurance-linked bonds, secondary equity funds and other investments beside.
In addition, Poba has been willing to step into unusual areas as part of its larger interest in holding a heavy weighting in alternative assets; Jang has told AsianInvestor that around 58% of W13 trillion ($11 billion) in assets were invested in alternative assets as of the end of last year.
However, Jang is aware of the state of the world, including rising misgivings that the global economy (or at least the US one) could be set for a downturn. One way to help prepare against that is to ensure has fund makes investments that might flourish in that environment – such as bad debts.
Poba began by committing $50 million into Insolve Global Credit Fund III as a limited partner last year. The pooled feeder fund is managed by Balbec KPL Asset Management, a Korea-based affiliate of US bad debt expert Balbec Capital. The global company had raised $727 million for the fund by its final close in April 2018
Balbec focuses on investing on insolvent credits from global consumer and small to medium enterprises – particularly US mortgages. As Jang told AsianInvestor, “the market for these assets is fragmented, inefficient and often misunderstood,” while “Balbec is widely regarded as having been a leader in the consumer insolvency sector globally for nearly 30 years”.
Distressed debt funds alos have the advantage of not being very correlated to traditional capital market movements, while offering a decent return.
Despite its short lifespan, IGCF III has demonstrated the feasibility of this approach. While Balbec says its funds look to offer an internal rate of return of around 11% to 12%, the fund has already invested over 80% of committed funds, and shown a gross IRR 21% and 12% dividend yield to date.
Plus, Jang said the local division of the fund manager helped gain the confidence of local investors.
“Balbec KPL is a local asset management company which has an excellent relationships and great reputation in assisting Korean investors like us,” Jang added, noting that Korean investors have supported Balbec KPL’s IGCF I, II and II to the tune of $400 million in commitments. “
So when Balbec KPL began touting another feeder fund called IGCF IV this year, Poba was interested.
“We learned of this fund from Balbec KPL as well as other Korean investors, who had invested with Balbec and Balbec KPL in IGCF-III and because of its strong performance in elected to also invest in IGCF-IV,” said Jang.
He noted that the fact it essentially had a similar focus as the previous fund and the same key employees in Balbec KPL and Balbec. That gave him comfort.
However, this new fund is expected to be bigger, with a planned size over $1 billion or more in commitments. Poba ended up committing $100 million towards it.
BUILDING TRUST
For Poba investing in the new fund offered two advantages: it helped it expand and diversify its investment portfolio in distressed debt, an area in which it lacks the internal capababilities to invest. Plus it further cemented its relationship with Balbec.
“The goal of the [new] mandate is to expand Poba’s relationship with Balbec and Balbec KPL and continue to diversify its portfolio by geography and asset type,” said Jang, adding that “this is a somewhat unique fund because of its focus on assets in insolvency and Balbec’s long track record and expertise in this asset class”.
The new fund is likely to help with geographic diversification. It is targeted mainly at the US consumer insolvencies, where it’s likely to invest 50% to 70% of its assets, with the remainder likely tobe invested in Europe, Australia, Canada and the UK.
The fund also appealed because of the possibility that it would help Poba mitigate the exposure of its mainstream assets to pitches and yaws in the equity and bond markets.
“This asset class is less correlated to the financial markets and will generate attractive risk-adjusted returns across any business or economic cycle with strong liquidity as the funds are self-liquidating,” said Jang.
Despite its experience in the previous fund, Jang said Poba worked closely with Balbec and its Korean division to understand the new fund’s key risks, potential returns, and how this fitted with the pension fund’s own risk-return appetite. Poba typically has an investment return target of around 5%, which can be challenging to achieve in fixed income.
EXPERIENCE COUNTS
Why go with Balbec again? After all, as Jang noted, Poba’s expanding asset base means it needs to invest more funds each year. The pension fund is accumulating approximately $600 billion in new assets every year, and needs to reinvest another $400 million a year as other investments mature.
That leaves it with “opportunities to review numerous global deals every year,” said Jang.
“We generally select 20 to 30 deals in the investment amounts of $50 million to $200 million,” he added.
In part the decision to offer more money to Balbec was down to a rewarding experience so far. Poba’s commitment to the previous IGCF III fund allowed the pension fund “to evaluate the seasoned track record and prior fund performance in contemplating [our] investment”.
And, as noted, this fund had demonstrated a healthy gross IR and dividend yield. That offered a persuasive argument.
For the rest of the year, Poba will continue to seek out more external mandates as its asset pool continues to expand and it outsources more mandates. The fund is looking at possibilities in the buyout, secondary and mezzanine investing strategies, and has began a request for proposal for these strategies a few months ago.
Overall, the emphasis is increasingly on more defensive assets, noted Jang. “Poba will continue to diversify its portfolio into various asset classes and types which could provide rich cash flow with good downside protection and less correlated risks,” he said.
Distressed debt offers that coverage in spades. It will be worth watching where this inquisitive Korean pension fund looks to invest next.