For the past 20 years, South Korea has undergone a renaissance that has put it at the apex of innovation, culture and growth. That same renaissance has also fostered financial success across a wide range of Korean institutional investors who are now looking to diversify their private equity investment portfolios beyond their own country.
Fueling this interest by Korean LPs in offshore investment is the country’s low-interest-rate environment, as well as limited domestic investment opportunities. Alternative investments – with their potential for greater alpha – have become a particular focus for many Korean institutional investors, as evidenced by more recent mandates from government pensions and private market participants. Diversification among investment strategies within alternatives is also a focus for these investors. LPs are actively seeking opportunities for investment in credit (US and European direct lending products), infrastructure, secondaries and co-investment funds, as well as in small to midcap buyout managers with a history of outperforming a benchmark.
Most alternative fund managers have heard of Korea’s investment giants – National Pension Service and Korea Investment Corporation – but the current investment market has created a world of other institutional investors also looking for the return potential offered by offshore alternative investment offerings.
To obtain access to this array of Korean LPs, however, an offshore manager must first meet two relatively reasonable requirements imposed by local securities laws: registration of its fund with the local regulator (the Financial Services Commission) and the appointment of a local distributor.
The FSC registration process is often referred to by offshore managers as “registration light” – ie, while it requires the filing of an application and a translated private placement memorandum, it is generally a straightforward process for which approval of the registration can be obtained as quickly as within six weeks. Local counsel are well-versed in the process and can provide the necessary support without ‘breaking the bank’ of mid-market managers. Subsequent ‘oversight’ by the FSC is also considered to be light touch – ie, it involves certain updates and reports, but only with respect to local investors. (If no Korean LP ultimately invests in the fund, the fund’s registration can be withdrawn.)
The second requirement – the appointment of a local distributor – can be easily met by hiring a placement agent who is well-versed in the local regulatory landscape and who holds strong relationships with local investors and distributors. Only full-service global placement agents are likely to have already entered into sub-agency agreements with one or more licensed Korean distributors. In these cases, there is no need for the offshore manager to find and enter into its own agreement. Rather, the manager’s fund can be added to the local sub-agent’s marketing remit quickly and easily under its existing agreement with the global placement agent.
Good global placement agents usually choose Korean sub-distributors wisely. There are many FSC-licensed financial investment companies and the right distributor will know the players in the market, reduce language barriers and follow the appropriate due diligence. Often the best distributor will be suggested by a consultant or placement agent; it is certainly not the type of relationship that should be generated by a cold call.
In sum, it is important to keep in mind that the Korean marketplace has been quite enthusiastic about investing with offshore managers. The country’s securities regulations were never meant to be a firewall, but a tool to help create alignment in the offshore investment landscape given the contrasting languages, communication and compliance styles involved. For most alternative fund managers, one or more investments from strong institutional Korean LPs should easily justify any efforts taken to meet the relatively minimal local regulatory requirements.