Private debt recently became one of the most favored asset classes for South Korean asset owners, alongside co-investments in overseas alternatives.
In the ASK 2017 Private Debt & Equity Summit on May 17, major South Korean pension funds and mutual aid associations said they will push further into global private debt funds this year, shifting their focus towards the US from Europe.
As rising competition raises fears of price bubbles, Korean asset owners are trying to reach out to the lower levels of debt, distressed loans and small-cap firms, as well as non-sponsored transactions to find a new niche.
They also want to take advantage of credit risks arising from a US rate hike and a future tapering of quantitative easing in Europe by diversifying credit starategies.
The following are remarks from senior officials of major South Korean pension and savings funds in panel discussions during the conference hosted by the Korea Economic Daily in Seoul.
▶Teachers’ Pension (Young-sin Jeong, global alternative investment head):
“We analyze portfolios by asset class, and use a top-down approach by region and strategy to set investment strategy.”
“In 2013, we began investing in PDFs through direct lending. Last year we invested in a mezzanine strategy for the first time. We invested where we could earn cash yields immediately. We invest in developed countries such as the US and Europe.”
“In the early years, we had done secondary investments to mitigate J-curve effects. Now we are expanding into co-investment and multi-strategy.”
“This year we will divide them into senior, mezzanine and subordinate and use a multi-credit strategy.”
“We are looking closely at US tax reforms and exchange volatility. Should corporate tax cuts revitalize the US economy, alternative investments will gain momentum because of money demand.”
▶Military Mutual Aid Association (Ki Pum Kim, a team manager):
“We had invested steadily in Europe PDFs until last year. Geographically, we started in Europe and moved to the US. Strategically, we focused on sponsored deals. But due to competition, we are shifting towards non-sponsored transactions.”
“After starting with senior secured debt, we are going down to mid-caps.”
“With a larger number of new private debt funds being launched, we need to worry about increasing dry powder. We also need to look at default rates. In a longer term, (QE) tapering in Europe and interest rate rises in the US will drive higher default rates of companies in fragile states.”
“We need to look at differentiated PDFs and distressed (loans), as well as NPLs.
“We started with secondary investment because of J-curve effects. We chose secondaries to learn and use their platforms, too.”
“Because of valuation concerns, we are considering investing in venture capital funds. We put focus on manager selection and whether they can provide co-investment opportunities.”
▶Government Employees Pension Service (Woncheol Suh, head of private market investment):
“In 2015, we began investing in senior corporate debt. As a follow-up, we picked two general managers last year and entrusted $100 million to invest in the US-focused mezzanine funds.”
“In the third series, we selected two general managers using opportunistic strategies in expectations of imbalance arising from asset price volatility and event risks. We completed the commitment of $140 million in the first quarter of this year.”
“Even if banks return to the lending market in full swing, they will have difficulty in taking leadership back. In this context, we need to know other financing sources and their supply and demand conditions.
“In a short-term perspective, I don’t think PDF opportunities will be reduced. PDFs, in which we place our committed capital, have less vulnerability to market fluctuations than other asset classes. But we take a close look at credit risks. We need to find general partners who are good at managing such risks.”
“Our liability structure is the key factor to consider when making an investment decision. Because our liability structure is in the mature stage, we focus on assets generating quick cash inflows. It is desirable to invest in secondaries rather than primaries, and deals including lending, too.”
▶Korean Teachers’ Credit Union (Philip Yoon, head of global alternative investment):
“Of 22 trillion won ($20 billion) AUM in 2016, around six trillion won was in real estate and infrastructure assets. Around one trillion won was in private debt, private equity and hedge funds.”
“We were highly interested in Europe PDFs because of low FX hedging costs. As Europe is faring better after elections, they are leading to good returns.”
“We have invested in CLOs which have been generating satisfactory returns since 2015. We will do one or two more (CLO investments) this year. We will increase our CLO exposure through early next year. When investing, we will lead negotiations to take a majority as we did before.”
By Donghun Lee and Daehun Kim
<Edited by Yeonhee Kim>