Hyundai Marine & Fire Insurance Co. Ltd., South Korea’s second-largest non-life insurer by assets, is considering investing in one or two additional buyout funds this year after committing $90 million to two overseas buyout funds, and it is studying makig co-investments in overseas companies around next year, said its chief investment officer.
The insurance company had committed €50 million ($53 million) to a €7 billion buyout fund of British private equity firm BC Partners LLP, in a rare investment by a South Korean insurance company in a single buyout fund.
It also invested £30 million ($37 million) in a Macquarie-led consortium which had bought a 61% stake in the gas distribution networks of National Grid Plc. to acquire a minority stake in the UK utility, jointly with other South Korean insurance firms and pension funds.
“We are considering investing in one or two additional buyout funds this year,” said Young-cheol Lee, CIO of Hyundai Marine, in a recent interview. “After building our capacity, we would begin co-investment around next year.”
He did not elaborate on the target asset and the investment size for buyout funds and co-investments which will be all made abroad.
Hyundai Marine has started investing in private equity funds to make up for falling returns from domestic investments, and committed $20 million to $50 million each to 13 PEFs in the past few years.
It is now mulling increasing its commitment to $100 million for each PEF in the future, while the upcoming new capital rules on insurers forces the company to reduce exposure to risky assets.
For real estate investment, Lee said that Hyundai Marine will steer clear of equity investment and focus on mezzanine debt for a while, citing new capital requirements which apply high risk coefficients (12%) to stocks and equity investments.
Hyundai Marine has allocated 2% of 29 trillion won ($25 billion) of assets under management to overseas alternative investments.
Following are Q&As with Lee.
Q: On investment in private equity funds
A: We have been expanding investment in overseas private equity fund from two years ago to make extra profits. We had started with PEFs which producd a steady stream of dividend incomes and carried low risks. After investing in secondary funds and funds of funds, we have started investing in buyout funds with high risks.
We have been expanding PEF investments by stages. Our next step will be co-investment. After building our capacity, we would begin co-investment around next year.
Q: Which stage is your co-investment plan in?
Q: Co-investment requires an enormous effort on our part because we need to examine individual companies by ourselves.
Regarding buyout funds, we are considering investing in one or two additional buyout funds this year, in addition to BC Partners’ (fund).
Q: Reasons for starting investment in PEFs?
A: It was to diversify portfolio and regions of investment and to improve investment returns. We expect our PEF investments to deliver returns of 10 to 15% on average. The risk coefficient of 12%, which weighs on the RBC (risk-based capital) ratio, applies to PEF investment.
But there are many market participants and various investment opportunities abroad. Since starting investing in PEFs two years ago, we have invested in 13 funds. We had invested $20 million to $30 million to each fund, and now increased our commitment to $30 million to $50 million. We are considering increasing our commitment further to $100 million in the future.
Q: Are you interested in Asia-focused PEFs?
A: We have not looked at emerging markets yet because of high risks of countries which lack regulations and systems. US and Europe come first. Same goes for infrastructure investment: we target developed countries such as US, Canada and Europe.
Q: Composition of your asset portfolio?
A: At the end of last year, it broke down into domestic bonds (40%); domestic loans including mortgage loans, insurance policy loans and M&A financing (about 30%); overseas investment (about 15%), most of which (or 13%) were invested in overseas fixed income; alternative investment (2%); and stocks (1.5%).
I have no immediate plan to make a big change to our asset portfolio, but we are preparing ahead of the adoption of new risk-based capital rules.
Q: Effects of new IFRS adoption?
A: It is inevitable to adjust our portfolio in the long term, because new requirements for classifying financial instruments under IFRS 9 raises profit and loss volatility. It applies mainly to beneficiary certificates, structured notes and project finance investment.
We have already scaled back structured notes, profitability of which declined due to interest rate falls, as much as we could. We cannot help but reduce the portion of risky assets in our whole portfolio by stages.
Q: Any difficulty in making overseas investment because of RBC rules?
A: Because of the rules, we need to reduce the equity portion slightly. But considering the rate of returns, we need to keep our exposure to equity investment at a certain level. That is, for asset duration management, we will buy as many bonds as we can, while putting some portion into the sectors which can deliver extra returns.
Q: Where to make alternative investment primarily?
A: We focus on overseas real estate and infrastructure funds.
Lending to infrastructure generates interest incomes of about 4% with an over 20-year time horizon. Considering that yields on domestic bonds are at the 2% level, they are even more attractive investment.
Also, there are plenty of investment opportunities in relation to SOC (social overhead capital). We are studying investing in power plants and oil and gas pipelines on a steady basis.
Q: On overseas investment goals
A: Because of the eye-catching policies of Donald Trump, we don’t know how and when the investment environment will change. Elections due in Europe are another variable. So, it is desirable to adjust to the situation.
We will make steady investment in overseas bonds, real estate and mezzanine loans to SOC, and continue to make efforts to find equity investment targets which will lift the rate of returns.
Q: On currency risk management on overseas investment
A: Hyundai Marine has employed the full hedging strategy so far. But if we reach a certain size, we may not hedge our currency exposure for some assets, as does the National Pension Service.
Q: On investment in fixed-income securities
A: We bought a lot of US bonds last year. We primarily invested in bonds issued by state-owned institutions and universities. Bonds issued by Stanford University are rated AA or above, and their yields are 3 to 5% which are relatively high. They offer higher returns than domestic bonds, and we can expand our duration through the investment.
When it comes to domestic bonds, corporate bonds used to take the biggest share, but we have switched many of them to government bonds. The duration of corporate bonds is only 3 to seven years, and they are difficult to diversify because there are not many targets with high credit ratings. With offshore bonds, we are making up for declining returns caused by switching into government bonds for the duration extension.
Q: On overseas real estate investment
A: The location and tenants are the most important factors for overseas real estate investment. Core buildings in major cities, leased to reliable institutions in long-term contracts, have low risks and produce relatively high returns. When deciding to invest in So Ouest Plaza and Allianz Campus, we took into consideration that they will be leased to L’Oréal and Allianz for the next nine years and 15 years, respectively.
Q: Implications of US interest rate rise for your investment?
A: US real estate prices have soared, so we will take a cautious approach to them for a while. At the current lending rates in German, 1.2% a year, it looks fine to make real estate investment backed by physical assets. The 30 Crown Place building in London, which we had invested in three years ago, generated 40% of profits from the recent sale alone, in addition to dividend incomes of 7% we had secured every year.
But considering volatility, we will switch equity investment (in real estate) to mezzanine loans for a while.
By JiHoon Lee and Chang Jae Yoo
<Edited by Yeonhee Kim>