Korea public officials’ fund says interested in Australia infrastructure, offshore debt funds

  • 2017-02-14

(Corrected: Numbers in the first and third paragraphs were corrected to $500 to $600 million, and $880 million, respectively)

The Public Officials Benefit Association (POBA), a retirement fund for South Korean government employees, is planning to invest about $500 to $600 million in new alternative investments this year with a focus on offshore infrastructure, private debt funds (PDFs) and structured debts, its senior executives said.

POBA sees more investment opportunities in Australia’s infrastructure on the back of toughened regulations on Chinese investors in Australia, and it is also looking to US infrastructure for an annual return of 5%.

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“We expect a net increase of around 1 trillion won ($880 million) in our assets this year, 60 to 70% of which will be allocated to alternative investments,” POBA’s CEO Sang-soo Yoo told reporters in a recent news conference held to discuss last year’s performance and investment plans.

To further diversify alternative portfolios, the savings fund will target logistic centers, residences and housing facilities in pursuit of steady streams of dividend incomes. Alternative investments make up around 50% of POBA’s $8 billion assets under management.

POBA trimmed this year’s target return to 4.6% from last year’s 4.8%, reflecting intense competition in the alternative investment market and political risks under the US administration of Donald Trump.

“Our concern is because of deepening competition in the global alternative investment market, blind-pool funds which we have committed to did not make as many capital calls as we expected,” Yoo said in the opening speech of the news conference.

Earlier this month, POBA had preliminarily selected five asset management firms – two US and three European – to invest a total of $120 million in offshore blind-pool private debt funds.

Last week, POBA decided to commit 40 billion won to an infrastructure fund of Australia-based AMP Capital for an expected annual return of 6.5%.

Following are Q&As with CEO Yoo and CIO Dong-hun Jang during the conference.

Q: On infrastructure investment

A (Jang): We are considering investing in senior secured debt of US infrastructure. It will produce a 5%-level return in terms of dollars. (Note: POBA is seeking to invest about $30 million in a gas-fired power facility under construction in Lackawanna County, Pennsylvania)

We are also interested in secondary infrastructure investment. Within the infrastructure segment, we need to diversify target countries and regions to Australia and others beyond the US. There are several of stable investment targets available which are run in contracts with their governments or municipal governments.

China is tightening controls on foreign exchange reserves. Australia has tightened prior screening and toughened regulations on Chinese investors. Those factors may create investment opportunities.

A (Yoo): Once the US government starts infrastructure investment in full swing, we will be more aggressive in investing in them. If they offer an annual return of 5%, it is worth dashing for them.

Q: On offshore blind-pool funds

A (Jang): This year we will continue to make active investment in them. We will deploy capital to various blind funds including PEF and PDFs.

Recently, we have preliminarily selected five investment firms for offshore blind-pool private debt funds after a beauty test. We will complete the decision this month after conducting due diligence, and commit a total of $120 million to them. We plan to select three European management firms and two US management companies, given that our US portfolio has reached a limit to some extent.

Q: On fixed-income assets

A (Jang): After global interest rates rose after the election of Donald Trump late last year, we have had more opportunities of investing in offshore structured debts. Our priority is on upgrading our asset matrix with a focus on offshore infrastructure, private debt funds and structured debts.

Q: How would you improve asset matrix?

A (Jang): We started overseas real estate investment in full swing in 2015, and diversified them in 2016, including investment in cat bonds. We are now studying with our asset management staff on timberland and farmland for which we have not decided yet where to invest.

We focus on logistic centers, residences and housing facilities, which produce steady streams of dividend incomes.

Q: The biggest worrying factors for overseas alternative investment?

A (Yoo): We need to be on alert for a possible conflict between the US and China over foreign exchanges, and the US naming of currency manipulators.

Q: How to respond to global interest rate rises?

A (Jang): We are buying structured debts such as PDFs ad CLOs, expanding fixed-income assets. We sold most of real estate with fixed-rate leases last year. When investing in fixed-income assets this year, we will go for floating rates.

Q: On stock investment

A (Jang): Because we pursue absolute returns, the proportion of stocks changes dramatically. We will continue to reduce the proportion of stocks in total assets. But just for the first half of this year, we will increase their proportion because the first-half economic outlook is not bad.

By Daehun Kim

daepun@hankyung.com

<Edited by Yeonhee Kim>