KIC to embrace broader client base, assets with eased regulations

  • 2016-11-16

South Korea will sharply lower the minimum amount to be entrusted to the Korea Investment Corporation (KIC) to about $86 million and allow the sovereign wealth fund to diversify into a broader range of alternative assets, opening the doors of the state fund wider to small-sized public funds.

Under the revision of the enforcement decree of the KIC Act which was approved at the cabinet meeting on Nov. 15, the government will also loosen conditions for an early redemption call to the KIC and allow the sovereign wealth fund to tap a deeper pool of asset managers to pick its chief investment officer and steering committee members. The revised regulations will be in effect from later this month, the finance ministry said in a statement.

The announcement came after a KIC source told the Korea Economic Daily in July that it had asked the finance ministry to revise part of regulations governing the sovereign wealth fund in order to qualify the KIC’s in-house officials and investment managers from other funds for its CIO position.

“The regulations on entrusting assets to the KIC and conditions for early redemptions were too strict, discouraging small- to medium-sized domestic funds from entrusting money to the KIC,” the Ministry of Strategy and Finance said in the statement issued after the cabinet meeting.

KIC manages foreign exchange reserves from the South Korean government, the Bank of Korea and public funds. It had invested about $108 billion in overseas assets at the end of October of this year, a similar amount to the National Pension Service’s $110 billion in global investments.

The regulation revision also comes as small-sized domestic funds are keen to join forces with the sovereign fund in exploring overseas investments.

“From the point of investors, they can make use of the KIC’s global investment expertise. For KIC, it will achieve the economies of scale with the expanded assets size, so it can improve management efficiency,” the finance ministry added.

Details of the revised enforcement decree of the KIC Act are as follows:

  1. The minimum investment amount to be entrusted to the KIC will be lowered to 100 billion won ($86 million), from 1 trillion won ($856 million).
  2. Early redemption call for the KIC will be accepted in the following case: (1) when South Korea’s foreign exchange reserves drop by more than 5% from a month earlier for two straight months, compared with the previous requirement of over 10% month-on-month drop for two months running; (2) when the sovereign credit rating of South Korea declines, versus the previous requirement of a drop below investment grade; or (3) when internal and external economic conditions are deemed to have turned a drastic turn for the worse (newly added condition).
  3. Special asset classes will be added to the list of investible assets for the KIC: physical assets other than securities and real estate; for example, social overhead capital projects and debt instruments.
  4. Regarding candidates for private members of the KIC steering committee and the CIO, a stint at the KIC itself, Green Climate Fund and Asia Infrastructure Investment Bank will be counted as the period during which the applicants are believed to have worked for an eligible institution.
  5. Qualifications for KIC’s compliance officer will be specified.

<Edited by Yeonhee Kim>