[Interview] Korea teachers’ fund CIO: interested in equity stake in asset managers’ holding firms

  • 2016-05-31

Korea Teachers’ Credit Union (KTCU), which manages 22 trillion won (about $18 billion) of assets, is considering an equity investment in holding companies of investment firms which may be modelled on Affiliated Managers Group (AMG), its chief investment officer said late in May.

In 2016, the savings fund is planning to commit an additional 1.5 trillion won to alternative assets, and it may participate as a financial investor in South Korea’s shipbuilding or shipping companies in the process of their restructuring, said Kang Sung-Seog, CIO of the KTCU.

“We can earn dividend incomes from investing in a listed holding company of asset management firms and at the same time, we can acquire knowhow from top asset management firms. So we take it as a good investment opportunity,” Kang told the Korean Investors in an interview.

KTCU is the country’s largest savings fund, consisting of school teachers and personnel and college faculty as members. Its 22-trillion-won assets under management break down to domestic equities at 14.5%, local bonds at 22.8%, domestic alternative assets at 28.5%, and overseas assets at 34.2%.

Kang took office as CIO last September for a three-year term. After graduating from Sungkyunkwan University in Seoul in 1986, he joined the KTCU in 1987. Before taking over as CIO, Kang had led risk management, financial investment and global investment teams of the credit union. He also had worked for a venture capital investment unit of the KTCU.

The following are Q&As with Kang.

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By Young-woo Kim                                                                                                         youngwoo@hankyung.com

Q: KTCU is well-known for pioneering investment in overseas real estate assets as a domestic institutional investor.

A: “It has been over 10 years since we initiated investment in overseas real estate assets. Since 2014, we have been investing in overseas private equity funds. We also make investments through SMAs (separately management accounts). We are also investing in primary funds and secondary funds, as well as doing co-investments. Secondary investments have many merits in that they are quick for redemption. So they are advantageous for an institution making commitments to funds. Another merit is that the J-curve effects will be offset. For the first time, we committed 250 billion won to funds of funds two years ago, and invested about 100 billion won in a secondary fund earlier this year.”

Q: KTCU seems to prefer fund of funds strategy.

A: “That’s the strategy favored by an institution that makes its first overseas investment. Fund of funds players keep a close track of trends in an increasing number of global asset management firms. They are also good at following up staffing change in managerial positions. Fund of funds investments will help us use the experience, when we start direct investment later on.” 

Q: How much are you going to commit to overseas PE investment this year?

A: “We do not implement a predetermined amount of commitment at once. Instead, we have to make a precise assessment of cash-flows and then diversify investments. We are thinking about committing about 200 billion won to overseas private equity investment this year. Also, for overseas PEs, we should have different vintage years on a continual basis. It is because only when we have chances of cashing in investments either in time series or cash-flows, we can make an additional investment.”

Q: Is it basically blind fund investment?

A: “They are all basically blind type investment, including real estate and PEs. In the case of assets such as buildings, it is not easy to make direct investment, unless it is target loans. We prefer blind funds that give property loans because they generate steady cash-flows. But they have a limited upside potential.”

Q: Do you have any distribution target, say, distributing liquidity by some percentage and by fund strategy?

A: “Approximately, we are trying to meet the target of assets with stable cash-flows at 70% and the remainder at 30%. The 70:30 principle will also apply to alternative assets. Overseas real estate assets have the biggest share (of the alternative assets), in which we have invested about 3.5 trillion won.”

STUDYING “AMG” BUSINESS MODEL FOR INVESTMENT IN SIMILAR FIRMS

Q: How much fresh investment are you going to make in alternative assets this year and how would you do that?

A: “It is about 1.5 trillion won. We have been carrying out the investment as planned. In the case of structured bonds, we commit 100 billion to 200 billion won in a batch. Given that, we think we will be able to meet the target.”

“We are studying closely the business model of AMG, which is a holding company of investment firms. The company is a holding company with equity stakes in investment firms and is also listed. We think it will be a good opportunity to earn dividend incomes and acquire knowhow of high-performing asset management firms.”

Q: Do you mean you will make direct investment in asset managers’ holding company?

A: “Yes, we do. We are willing to come to the table of direct negotiations over an equity purchase. If we make such an investment, we can closely follow trends in global asset management firms and implement investment through the asset management firms in which the holding company invests. Therefore, we can solve the problem of the global network shortage.”

Q: Any plan of investing in venture capital firms?

A: “With respect to overseas venture capital investment, we review them for fund of funds investment. We are thinking about 50 billion won this year (for a possible investment in venture capital firms), if we do. We will screen investment plans case by case before implementing them. But we think it is a waste of resources if we carry out a beauty contest by ourselves for venture capital investments. It would be enough for us to employ a strategy of joining in an investment led by large institutions such as NPS (National Pension Service).”

Q: You have preferred “core strategy” for real estate investment, but the market conditions are not favorable.

A: “Even for the same types of loans, we have to scrutinize LTV (loan to value), whether the building has long-term rental contracts, vacancy rate and location together to make the loans a safe investment. If we miss one of them, we may have a hard time in exiting it. We had invested in many decent assets, but it is difficult to find such targets these days.”

“So we would like to have more interest in value-added assets. With interest rates remaining low, there is no way of making as many capital gains as before. To achieve over 10% IRR (internal rate of return), we have to make good use of leverage of a value-added asset. Of overseas investments, except for senior tranches, the others can be actually regarded as leveraged investments.”

“M&A funds basically buy a company cheap and selling it dear. The capability of a player with such abilities is important. Previously, PEFs could buy and sell (a company) to other PEFs without much difficulty. But the market condition is not as good as before.”

“The priority would be finding a partner that buys a company and can raise the corporate value. It goes the same for real estate and corporate M&A fields. Of overseas PEFs, some of them excel in mergers, and others in growing a company and re-listing it.”

Q: You mean it is important to hire asset management firms that can improve corporate value. Would you give more weight to GPs with such ability in future?

A: “We have already given preferential treatment to specialized asset management firms. They do not just “hold” assets, but are able to remodel the commercial building which they invest in. It seems that strong players, called as competitive local asset managers, are present by location. We prefer funds of funds which discover such competitive local asset managers and manage them.”

Q: What is at the top of the list of investment recommendations you received recently?

A: “There were many recommendations on senior corporate loans for the United States and Europe. It seems to become common that funds, instead of banks, give loans. Also, there are a number of funds of funds which employ such a strategy as making a substantial amount of equity investment and waiting until cashing in. The same goes for venture capital. We cannot achieve decent returns by only diversifying investments here and there, say, by 10%. Instead, we make a meaningful equity investment, change the owner, control the company and target a high rate of return. It appears that some global asset management firms are good at doing it.”

Q: Any other ways to make reference checks of asset management firms?

A: “We evaluate them by size, etc., but it is not easy. Big houses run hundreds of billion dollars, but their specialties differ by sector. Also, they differ in employee capability levels. We take into comprehensive consideration track records, members, business history, investment plans, problem-solving skills, fund recovery ratio, and the like.”

“Eventually, stability of the head (manager), or people, comes first. When a high-caliber manager leaves to set up his own company, we must line up to invest in the company. In South Korea, it is difficult to invest in an asset management firm which has no track records. But this practice needs to change. For high-performing asset management firms, we are willing to invest in accordance with the asset management firms’ timelines, not according to our commitment schedules.”

Q: Market talk is that competition between LPs has pushed real estate prices in South Korea sharply higher.

A: “They become very expensive. But it does not mean there are no suitable targets. Regarding the prospects that South Korea may face the demographic cliff in 2018, we cannot predict how the property market will be affected. I think we have to raise the portion of overseas investment.”

Q: Are you going to take a defensive strategy for South Korean equities? What is your outlook for second-half stock markets?

A: “South Korea’s stock markets are not dynamic. There are no managers running active portfolio management, either. Rather than checking returns against benchmarks on a frequent basis, we have to buy and sell value stocks which will do better one or two years later. But we only pick companies which are expected to fare better immediately next month, so the market is not in an orderly state.”

“With respect to the second-half outlook, we need to follow the foreign exchange market trends. If the dollar/yen rate drops to the 100 level, South Korean companies may benefit. Should the stock markets fall further, we need to buy (stocks). South Korean stock markets have been alienated from other countries that were in the upward trends since the 2008 financial crisis.”

Q: Any possibility of wide-range correction?

A: “A breach of the 1,900-point mark of the KOSPI may signal a sharp correction. Then it may be time for us to buy (stocks). Recently, the petrochemical industry in South Korea is doing well. Even if artificial intelligence is progressing, the petrochemical market, which provides raw materials to a variety of industrial products, will likely remain.”

“But my concern is that South Korea’s large business groups, which have to acquire leading foreign companies in the next one to two years and use them as a stepping-stone for future growth, are not making such a decision.”

“We had tried to add meaningful value stocks to our stock portfolios, but it was not easy. So we will add many dividend stocks going forward. We will continuously buy stocks of which the market price-dividend ratio is about 2~3%. With regard to response to market conditions, we will do it through outsourcing (entrustment to outside management firms).”

Q: What is your view on South Korean economy?

A: “Although a fourth industrial revolution is coming, exports have been running out of steam. We think the dollar/won exchange rate should go up, but it is not easy to do so. Given that our country has been posting trade surpluses, although in a slump, we are on the monitoring list (of the United States) of foreign exchange policies, so it is not easy (to drive up the dollar/won rate).”

KTCU INTERESTED IN FINANCIAL INVESTMENT IN SHIPPING FIRMS

Q: About restructuring of South Korea’s shipbuilding and shipping sectors which is a hot issue now 

A: “South Korea failed in corporate restructuring after the financial crisis (in the late 1990s). The bungling restructuring only resulted in a cut in production capacity. If we fail in restructuring in this point of time, it will be difficult to reap a “yield” when the industry turns for the better. Thus, I think a thorough preparation is needed.”

“Shipping companies act as so-called highways for foreign trade. So no decision should be made hastily to liquidate them. Global shipping alliances would lead to tangible and intangible benefits to a substantial extent. If there is a decent deal (in the process of restructuring of shipbuilding and shipping firms), KTCU may participate as a financial investor.”

By Kim Dae-hun

daepun@hankyung.com

 

<Edited by Yeonhee Kim>