Trends of the Year: Korean LPs to the fore

A low interest rate environment and growth in pension fund money continue to fuel to South Korean LPs' expansion into alternatives.

The South Korean investor landscape saw great changes in 2017.

Several pension funds and insurance companies from the Asian country pledged to increase their exposure to alternatives this year as they face public pressure to deliver higher returns.

Korea’s largest pension, the 601 trillion won ($550 billion; €466 billion) National Pension Service, said in March it is planning to increase its holdings of foreign and alternative investments from 31.3 percent in 2017 to up to 40 percent by 2021, following the Ministry of Strategy and Finance’s asset allocation plans.

Other institutional investors are following NPS’s lead. By 2021 the 5.4 trillion won Government Employees Pension Service is set to allocate up to 24 percent of its total assets to alternatives, and the 14 trillion won Korea Teachers Pension Fund is planning to allocate 40 percent over the next three years. Meanwhile the Public Officials Benefit Association also said it is plotting to expand its alternatives portfolio with an additional 700 billion won into private equity.

Korean pensions have been overweight in fixed income – as much as 70-80 percent of their portfolios historically – compared with the portfolios of European or US pensions. Because of the sensitivity of interest rate movement as well as the foreign exchange rate, Korean pensions suffer more compared with other global pensions.

With pension fund sizes increasing, it has become difficult to achieve required returns from investing in conventional fixed income and bonds because interest rates are so low, which is prompting this move toward greater exposure to alternatives, including alternative investments overseas considering domestic private equity is limited in size.

Insurers such as Samsung Life Insurance, Kyobo Life Insurance and Hyundai Marine & Fire Insurance are also getting more active in private equity and increasingly favouring the North American and European markets, according to PEI data.

With the additional capital to put to work, Korean LPs are diversifying into new strategies such as distressed debt and credit. Separately managed accounts have also grown in favour as LPs want more transparency and access to good investment opportunities while minimising risk.

Korea Scientists and Engineers Mutual Aid Association is one example. The investor plans to allocate $120 million to separately managed account for a multi-asset strategy by year end. POBA also has plans to put up $200 million into two offshore private debt managers via SMAs.

“It can be interpreted as if we now start buying tailor-made suits over ready-made suits,” a portfolio manager from POBA said in November.

Hyundai Marine & Fire Insurance, with $27 billion in assets, is also keen to expand its private equity and private credit exposures via separately managed accounts from its existing manager roster. Meanwhile, the $44 billion Korea Post Insurance Fund (Korea Post) is finalising negotiations to allocate $100 million apiece to two global multi-strategy fund of funds managers.

“Given our investment decision-making process, separately managed accounts seemed appealing to us as we found it hard to meet the deadlines for co-investment opportunities from existing managers,” said an investment officer from Korea Post.