PEI Forum: Takeaways for outbound Korean LPs

LPs in Korea plan to increase offshore allocations, but few have adopted an overall framework for overseas investing, delegates heard at PEI’s GAI Forum in Seoul.

Korean institutional investors planning to increase allocations to offshore alternatives should first build a five-ten year “blueprint” for investing, according to James Ahn, managing director at Clayton, Dubilier & Rice, speaking to an audience of mainly Korean LPs at PEI’s Global Alternatives Investment Forum in Seoul.

Korean pension funds and institutional investors want to increase their exposure to alternatives and to offshore assets, delegates heard at the Forum. Before executing on those plans, developing a blueprint would help address several challenges. 

“When starting to build an alternatives platform, put together a broad blueprint from the board or government agency overseeing your institution and agree on a five-ten year plan,” Ahn said. “You’ll have turnover, so mitigate that risk by putting together a longterm plan and getting support from multiple stakeholders. Only a few institutions have done that.”

A blueprint helps stablise the investment strategy of institutions, which in Korea tend to have turnover at the senior level every three years or so due to the business culture, Ahn said. Korean organisations encourage development of all-rounders rather than a person with narrow expertise in one area. Therefore, employees move around frequently. 

A blueprint would also help clarify portfolio balancing. A challenge for Korean investors in private equity is balancing between a portfolio broad enough to avoid risk concentration and not so broad that the result is average private equity returns, he said. 

The panel also spoke about LPs allocating between public and private markets.  

Jim Hildebrandt, managing director of Bain Capital Asia, pointed out that private equity provides higher returns than public markets in the long run with less volatility. He also noted that the slowing growth in China, for example, has created a situation where some subsectors are actually growing while the larger sector may be floundering, creating volatility and complexity in investment decisions. 

Jay Koh, managing director and partner at Siguler Guff, said that in Asia, the core investment story is the rising middle class with increasing spending power, which is most directly accessed through sectors such as consumer retail, healthcare, and business process outsourcing.

Increasingly investors say they want to do more [offshore alternative] investments, but resourcing is not where it needs to be and that puts a lot of pressure on the teams. Except for 1-2 sovereign wealth funds, most teams I’ve seen in the region are subscale for what they are trying to achieve

James Ahn, managing director, Clayton, Dubilier & Rice

But in emerging market indices, less than 2 percent of listings are in consumer retail, healthcare or IT, he said. The markets are dominated by large cap mining and metals, energy, and financial services. “There is limited public market exposure to [Asia's core growth] markets.”

Ahn added that private equity provides deeper insight into the investee company. “In emerging market [public companies], the information disclosure and the type of due diligence is not at the granular level you get to when you go into one-on-one discussions with the company. Private equity has this particular advantage, especially in emerging markets.”

Hildebrandt suggested some concrete steps for LPs increasing their exposure to overseas alternatives. First, decide on what proportion the institution wants in alternatives. “In Korea, some are thinking 3 -5 percent. They should be thinking 10-20 percent. Endowments typically have 30-50 percent. It all depends on where the institution wants to end up in the longterm.”

As a next step, he suggested deciding on the percent to allocate offshore and third, thinking long and hard about fund manager selection.

“If you’re re-entering private equity or going into it the first time, it make sense to consider either larger funds or fund of funds managers because they are the ones who can come back to Korea on a regular basis and provide regular reporting.”

In addition, Korean LPs need to look at scaling the team relative to the size of opportunities targeted, Ahn said. 

“Increasingly investors say they want to do more [offshore alternative] investments, but resourcing is not where it needs to be and that puts a lot of pressure on the teams. Except for 1-2 sovereign wealth funds, most teams I’ve seen in the region are subscale for what they are trying to achieve.”