Mounting institutional demand for international private investments is making South Korea an attractive destination for general partners. While fundraising in South Korea demands patience and persistence, the payoff for fund managers is a population of engaged investors building up their private capital exposure and establishing a track record as loyal LPs.
South Korean LPs are increasingly looking outside of their country’s borders to diversify their holdings and access new strategies. Having a local presence can help establish a GP’s commitment to the region, yet a few other factors are just as critical. Here are some key considerations for fundraisers navigating the South Korean market for the first time.
Bellwethers lend credibility
The South Korea pension system consists of three tiers. At the very top (and the third-largest pension in the world), the National Pension Service represents the first tier, with 918.7 trillion won ($707.7 billion; €671.5 billion) of assets under management. The second and third tiers consist of retirement pensions and private pensions, respectively.
NPS, thus, has an outsized influence as it relates to allocation trends, particularly within alternatives, where its smaller peers look to the pension as a standard setter. This is good news for global fund managers, as NPS is looking to increase its allocation to alternatives.
Moreover, in recent years, NPS has initiated concerted efforts to diversify its alternatives portfolio into overseas markets. Its domestic exposure dropped 80 billion won in 2020 to 24.7 trillion won, or 27.3 percent, of the alternatives portfolio, while overseas investments grew 6.4 trillion won to 65.9 trillion won, or 72.3 percent, according to its most recent annual report.
Private capital appetites
South Korean institutional LP allocations have traditionally revolved around infrastructure, real estate and secondaries as they sought to achieve current yields and to shorten the J-curve.
Prior to the pandemic, some institutional LPs had been actively seeking strategies associated with more risk. And many now are initiating exposures to venture capital, particularly through funds of funds, to provide broad diversified exposure and access to top-quartile managers. Growth equity and technology-oriented strategies are also in demand, especially given the obvious secular trends fueling returns in the sector that only became more acute in a remote-work environment. Further, LPs with more mature programmes are gravitating to lower middle-market strategies to enhance risk-adjusted returns.
Private market funds that fall into these categories are certainly at an advantage in attracting capital from South Korean LPs, though other considerations are just as critical.
Brand names matter
Well-known franchises, to nobody’s surprise, generally have an easier time securing meetings with prospective new LPs. This inclination for brand names, however, is even more pronounced in South Korea. In some cases, certain institutions have even imposed guidelines specifying that GPs need to be within a certain ranking on the global league tables.
Co-investments are popular
No different than the trends shaping other mature and sophisticated markets, a GP’s track record of offering co-investment opportunities can be a differentiator to institutions seeking more direct private capital exposures, and it is aligned to the LPs’ ongoing efforts to lower total management fees. The Korean Teachers’ Credit Union, Public Officials Benefit Association and Korea Post, for instance, are among those that have created a dedicated co-investment programme.
Doing their homework
Like any other prospective pool of LPs, those in South Korea need to trust that GPs are committed to the region and willing to put in the time and effort to foster long-term relationships. In this regard, LPs in South Korea are very deliberate and conduct extensive due diligence before committing to a fund.
Most LPs will expect multiple meetings with fund managers, ask many questions and seek extensive details about the firm, strategy, track record and in-house operations. Response times also matter, even for inquiries that seem inconsequential.
Another important distinction is that the LP landscape doesn’t adhere to the same top-down power structures that GPs are familiar with in North America or Europe. Many fundraisers will have a natural desire to meet directly with the chief investment officer, while in South Korea, it’s the many team members responsible for the due diligence that can be the most influential in decisions to make a commitment.
While South Korean LPs may be quite methodical and measured, South Korean institutions also have a reputation as being deeply loyal. As a result, GPs who put in the time and effort should benefit from a foundation for a long-tail relationship that extends to follow-on funds and even new strategies.
Albert Jun is a Hong Kong-based partner responsible for investor coverage across South Korea and broader Asia at placement agent Monument Group. He joined in 2015 after a 10-year stint at Korea’s NH Investment & Securities, where he was a vice-president and team leader of the fund placement division.