[Interview] Korea scientists’ fund zooms in on Europe renewable energy, U.S. venture capital

  • 2016-06-15

The Korea Scientists and Engineers Mutual-aid Association (SEMA), overseeing 4 trillion won ($3.4 billion) in assets, is interested in property and renewable energy projects in Europe and also planning to start investment in U.S. venture capital firms, its chief investment officer said.

The association is heavily weighted towards alternative investments that account for 70% of its total assets, and ahead of other domestic savings funds in property investments. But Du Yeong Jeong, the CIO of the SEMA, plays down the possibility of slashing the portion of alternative investments in the near future.

by Yeong-woo Kim

“It is because of South Korean market conditions. Interest rates are turning lower and property prices are rising,” Jeong told the Korea Economic Daily in a recent interview.

“We are zooming in on Europe’s value-add property. We also are interested in renewable energy projects which move in line with the policy direction in Europe,” the CIO added.

SEMA plans to lift the proportion of overseas investments to 42% of its total assets, or worth 1.7 trillion won ($1.5 billion). It would represent a 9%-point increase in overseas investments from last year’s. The AUM of the SEMA is expected to reach 5 trillion won by the year’s end.

Of alternative investments which make up 70% of its assets, real estate accounts for 37%, trailed by corporate loans with 28% and infrastructure with 5% by asset class.

Also, SEMA is now planning to invest in overseas venture capital firms through secondary or fund of funds. “In particular, we are taking a close look at the U.S. VC market,” said Jeong.

SEMA was set up for South Korean engineers with Ph. D degrees and working at the country’s state-run and private research institutes.

Jeong took office as the CIO in April, 2015. Prior to joining SEMA, Jeong worked for Meritz Fire Insurance and held various positions there including head of the investment management team. Earlier, he had worked at former Housing & Commercial Bank (merged into Kookmin Bank). He studies business administration in Sungkyunkwan University in Seoul and received a Master’s degree in the same college.

Q: Regions and asset classes you focus on for overseas property?

A: “We have once invested in property in Europe and the U.S. Now we are seeking to diversify into other regions. In particular, we are zooming in on North Europe where although the base rate is low, the market is clear, and real estate investment targets guarantee long-term lease contracts. Expected returns on those targets, at the level of 7~8%, are relatively high. We also see hotels in North America as promising.”

Q: SEMA is known for property investment expertise among Korean institutional investors

A: “Every year, in the investment review stage, we create three-dimensional matrices by region (Europe, Americas, emerging), by asset class (retail, office, hotel) and by investment characteristics and forms (core, value-add, PF, debt fund). We pick promising investments areas which do not overlap our previously-invested areas.”

“We make investments not in a way that we receive and review proposals from asset management companies, but in a way that we pick the sectors ourselves and directly go after global managers which are highly credited in the sectors. Because we consider each manager’s characteristics in making investments, we can make a strategic asset diversification.”

Q: Any reason you are zooming in on Europe’s infrastructure, such as renewable energy?

A: “Our target proportion of infrastructure is about 5% now. If we raise it to 8%, we can make an additional investment of up to 100 billion won (in infrastructure) within the two to three years. Infrastructure investments are made in accordance with government policy, so they are highly stable from an investor’s point of view. The reason we are zooming in on renewable energy in Europe is that European governments are expected to implement policy supportive of the sector for a while.”

Q: What is the noteworthy investment you made recently?

A: “Our investment in the office building, which Philadelphia IRS rents as a tenant, is expected to lead to an annual return of the 7%. On mezzanine loans (80 billion won) extended to airplanes which were leased to Singapore and Emirates airlines, we are expecting a 6%-level return. It is not bad to sign a long-term lease contract with an airline with a high credit rating. For the purpose of diversifying investments, we are planning to make an additional investment in another global airline.”

Q: Your investment plans in overseas PEFs or venture capital?

A: “Adding up overseas and domestic ones, we would like to have VC (investments) account for about 5% of our total assets. To increase VC investments to the 5% level from the current 3% level, we have to commit an additional 100 billion to 150 billion won. Up to now, we have invested only in domestic VC, but we are now planning to invest in overseas VC through secondary or fund of funds. In particular, we are taking a close look at the U.S. VC market. We will send our staff there on a business trip and get them to meet top U.S. VC, including Top Tier (Capital) Partners.”

“Regarding PEFs, we still have capital calls to meet, but we cannot help but making an additional commitment this year, too. Earlier this year, we had committed about $20 million to the secondary fund of Hamilton Lane. By the year’s end, we will commit a total of about $100 million to PEs.”

Q: Any reason to invest through secondary or fund of funds?

A: “Because we still lack investment experience. The reason that we favor indirect investments in VC (firms) is to strengthen our networking with Silicon Valley step by step.”

“Last year we set up a joint venture of venture capital investments, ‘SEMA-Translink Investment (SeTI)’, with Translink Capital which was established by Korean, Japanese and Taiwanese partners. We expect SeTI to help top-level scientists and engineers, who are SEMA members, go abroad.”

Q: There are views the proportion of 70% of alternative assets is too high

A: “We think that over a longer term, we have to lower the proportion of alternative assets, but it is not easy to do so for now. In order to lower the proportion of alternative investments, we have to increase that of bonds. But the outlook for South Korea’s bond markets is not good, and forecasts for U.S. interest rates are being changed. Earlier this year, we had set a plan to buy 30-year Treasuries and corporate bonds of double As or above, on expectations that the U.S. would raise interest rates a few times. But now that the expected rate rise in the U.S. is being delayed, we cannot help but deferring our (investment) plan.”

Q: Your stock investment plans?

A: “It would be difficult for domestic stock markets to get out of the boxed range. We expect the KOSPI to repeat cyclical movements froms 1,900 to 2,100. In a short-term perspective, we expect it would turn higher towards the third quarter and fall back from the fourth quarter. We are seeking to shift towards an index-tracking passive strategy. When it comes to new stock portfolios, we are planning to employ a strategy of investing in ETFs. We have not invested in overseas stocks yet.”

Q: Any plan to participate in private equity deals?

A: “Given our asset size of 4 trillion won, we cannot be an anchor investor. But in the case of blue-chip assets which guarantee exits, we cannot help but investing in them as an LP, after scrutinizing their valuations.”

Q: Market speculation is that a global shock may happen

A: “Making a prediction is not within the territory of investors. But if an economic shock hits Korea, it would be highly likely to be a China-led one. Every country that posted a high growth for a long period experienced growing pains. It is worrisome because South Korean economy is closely related to China.”

Q: Your outlook for domestic property market and investment strategy?

A: “SEMA has employed mid-risk, mid-return strategy so far, under which we invested in various markets ranging from retail (property), warehouse as logistics centers and apartment to office building. Regarding real assets, most of our holdings generate steady cash-flows. We put focus on loan-type (investments) rather than equity investments. Prices in domestic office buildings have shot up because of bidding from institutions. Considering abundant liquidity in the market, although demand is weak, the (domestic property) market is expected to be steady to firmer. In the case of hotels, supply increase will likely put a downward pressure on prices.”

“By contrast, the logistics sector appears promising. Growing demand for online shopping malls is highly likely to boost it. On property investments, we will invest mainly in assets having stable cash-flows. Regarding the government-led housing project, New Stay, it seems unlikely to deliver a high return. But if they have strong chances of being sold out or guaranteed cash-flows, we will invest in them.”

Q: Any alternative assets you would seek to sell within the year?

A: “There are seven cases to be put up for sale, worth 125.0 billion won. Their expected IRR is greater than15%. Of real estate assets, three cases worth 62.0 billion won are due to be up for sale. Four cases (worth 63.0 billion won), which we hold through PE (funds), also will be put up for sale.”

By Dae-hun Kim

daepun@hankyung.com

<Edited by Yeonhee Kim>