Asia-based alternative investment firm Pacific Alliance Group (PAG) is teaming up with a South Korean brokerage company to launch about a 200 billion won ($180 million) private debt fund in South Korea to provide senior loans backed by properties, and the Public Officials Benefit Association (POBA) will become its lead investor.
The investment review committee of the POBA, a savings fund for South Korean public officials, gave a nod on Oct. 5 to commit 70 billion won ($63 million) to the blind-pool PDF being raised by PAG and Meritz Securities Co. Ltd., a POBA source said on Oct. 9.
With the planned investment, POBA will become an anchor limited partner of the country’s first PDF for real estate secured loans, which target a return of 5.5% a year.
The fund will extend senior loans to help finance real estate purchases in South Korea in a special situation, or circumstances where property development is being suspended due to a funding shortage. It sets the loan-to-value ratio at 50% of collateral.
PAG will pick investment targets and buy real estate in a special situation at a 70~80% of the assessed value of collateral. Meanwhile, incumbent funds of PAG will take over the subordinated equity tranche of the real estate so as to absorb losses when asset prices decline. Thus, the fund will be able to achieve stable annual returns of as much as 5.5%, which seem decent in consideration of risks involved, according to the source.
Meritz Securities, a small-sized brokerage house in South Korea, will act as a financial arranger of the PDF with a five-year maturity (extendable).
Property-focused PDFs have been gaining ground in the United States and other countries because real estate collateral tends to guarantee stable returns compared to other funds. By comparison, previous PDFs set up in South Korea were aimed at lending for corporate buyouts.
“This investment decision in the real estate PDF, which will be the first one to be raised in this country, was made to find diverse alternative investment targets,” the POBA source told the Korea Economic Daily. “Earning a return of over 5% from property senior loans should be attractive in this low interest rate era.”
A number of other South Korea savings funds and insurance companies are known to be considering participating in the PDF.
A diverse array of foreign asset managers, including private equity and real estate investment firms, have been luring South Korean pension funds with a variety of new products, meeting their demand for overseas alternative assets. Still, domestic institutional investors focus on secured senior loans or mezzanine debt in search of stable, better returns than domestic investments.
By Donghun Lee
<Edited by Yeonhee Kim>