Inside GP selection process: NPS awards $600 mn mandates to 4 Korea PEFs

  • 2016-06-30

South Korea’s two local private equity firms, VIG Partners and SkyLake Investment, received 250 billion won ($216 million) mandates from the National Pension Service (NPS) on June 29, respectively, as part of the pension fund’s domestic PEF commitments.

The world’s third-largest pension fund said that it also picked two mid-cap Korean PEFs, Lindeman Asia Investment and SG Private Equity, to entrust 100 billion won ($86 million) to each of them.

The selection came a day after eight bidders for the mandates made presentations to the NPS in a so-called “beauty contest”, which applies only to the domestic PEF selection process and raises doubt about its efficiency.

Fund industry watchers call for a broad-based overhaul of the NPS’s PEF screening systems to better reflect the asset growth and improved expertise of domestic PEFs. The screening systems were introduced about 10 years ago when South Korea approved of the establishment of home-grown PEFs.

In particular, they argue that because of too much focus on fairness and transparency in the evaluation process, the NPS may not be able to choose qualified PEFs.

A source who had served as a senior manager of the NPS’ fund management division said that under the pension fund’s evaluation system, bidders for hundreds-of-billion-won mandates are screened after a mere 30-minute interview by committee members mostly from the private sector. Those members have no management experience, nor take responsibility for the results.

“The system puts too much priority on fairness and transparency. They need to find ways of allowing individual managers to have more autonomy,” the source added.

A South Korean PEF head, who failed in winning a PEF mandate from NPS last year, said that he had stayed up late preparing a presentation to the NPS for a few days. But he ended up with a heavy flu and delivered a poor presentation in a hoarse voice. The PEF was tipped as a strong candidate for the NPS’ domestic PEF mandates last year, because of its company reputation and track records.

“I feel responsible for it, because I failed to manage my body conditions properly. But I cannot throw away the thought that the NPS’ external manager selection system also has a hole.”

Another criticism over the NPS’ so-called beauty contest, which is unique for South Korean pension funds, is that it is a supplier-focused system, at a time when abundant free money finds no place to go because of low interest yields

For the selection of foreign PEF managers, however, the NPS follows global practices: receiving proposals from individual investment funds that are in the process of a fund-raising, reviewing them and making an investment decision.

By comparison, a source of the Korean Teachers’ Credit Union said: “We are considering expanding commitments on a frequent basis, at the point of time when talented management firms raise a fund.”

SELECTION PROCESS LIKE “OPERATION 007”

NPS, with $440 billion won under management, allocates about 1 trillion won to domestic PEFs a year, which is the largest amount of PEF investments by a South Korean limited partner.

In 2016, it will allot a total of 950 billion won to domestic PEFs and venture capital firms, including Wednesday’s mandates of 700 billion won awarded to four PEFs. Under the plan, it will commit 250 billion won to up to eight local venture fund managers in aggregate early in July.

The total amount earmarked for 2016 is about 30% lower than last year’s commitments of 1.3 trillion won.

An NPS source said a total of five PEFs had applied for the large-cap PEF mandates, and one of them was disqualified. According to industry sources, China’s IDG Capital Partners and Keistone Partners, headed by an accountant from a top South Korean accounting firm, were also among the bidders of large-cap mandates.

The low competition rate of 2-1 seems to reflect doubts about the efficiency of the NPS’ selection system, according to an industry watcher. It is not known publicly how many PEFs had participated in the bidding for the NPS’ mandates in the previous years.

Bidders were reviewed based on their documents and interviews. NPS’ working-level officials are in charge of document evaluation. Interviews are held by the external manager selection committee consisting of four unidentified private-sector members (professors, former or current private asset manager executives, et al.) and three NPS officials. To avoid information leakage, the committee members are picked two days ahead of interviews, which a private-sector committee member describes as “Operation 007”.

PEF managers subject to the NPS’ evaluation are given 10 minutes for a presentation and 20 minutes for Q&As. “They cut us off, if we go beyond 10 minutes. It seems like they are trying to be as fair as possible to all management firms,” said a South Korean PEF chief executive.

Officials of the NPS’ alternative investment division refrain from meetings, telephone conversation and lunch/dinner appointments with outsiders from a month before the evaluation process starts. The head of the NPS’ alternative investment division is excluded from the external manager screening process, while PEFs subject to the evaluation sign confidentiality agreements.

“After failed management companies sent anonymous letters and produced rumors, we started to put top priority on fairness and transparency as our evaluation principle,” the NPS source said. 

SkyLake is led by former Samsung Electronics’ Digital Media President, Daeje Chin. VIG Partners’ head, Byung Moo Park, was a star M&A lawyer of South Korea’s largest law firm Kim & Chang. Park, an eloquent speaker, also headed the Korean office of Newbridge Capital.

For mid-cap PEF mandates, Mirae Asset Venture and LB Investment competed with Lindeman Asia Investment and SG PE.

As part of other domestic alternative investments, the NPS will commit 400 billion won to loan funds and 200 billion won to sector funds in 2016.

By Dongwook Jwa

leftking@hankyung.com

<Edited by Yeonhee Kim>