[ASK 2018 SUMMIT Panel Talks] Korea teachers funds to boost Asia portfolios

  • 2018-10-26

The Korean Teachers’ Credit Union (KTCU) and the Korea Teachers’ Pension will step up real estate and infrastructure investments in Asia and other emerging markets to meet their target returns of above 5%, whereas the Public Officials Benefit Association (POBA) plans to increase infrastructure investments mainly in developed markets.

The three major pension funds in South Korea have shifted towards debts on global real estate and infrastructure assets from equites over the past few years in search of steady cash flows, but they focused on the US and Europe.

By asset type, KTCU will continue to chase mezzanine and other debt-type assets for overseas real estate and infrastructure, and Teachers’ Pension is preparing to expand into infrastructure debt, said their chief investment officers.

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The following are remarks from the CIOs of KTCU, Teachers Pension and POBA in a panel discussion of ASK 2018 Real Estate & Infrastructure Summit in Seoul on Oct. 23.

 BRIEF INTRODUCTION

* Korean Teachers’ Credit Union (Sung-seog Kang, CIO):

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“It is highly likely for us to increase real estate and infrastructure investment going forward.”

“We’re seeking value-add strategy for real estate and investing aggressively in multifamily assets and portfolios away from office buildings.”

“Our overseas real estate investments are approximately 4 trillion won ($3.5 billion), and infrastructure investments are 1.2 trillion won.”

“Our hurdle rate is 5% for debts and 7% for equities. Ticket size per deal is $50 million to $100 million.”

“We generally make equity investment via blind funds. For project-based investments, we invest in mezzanine (debts) secured on assets which generate stable cash flows.”

*Teachers’ Pension (Dae-yang Park, CIO):

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“Our ticket size per deal is $100 million to $150 million for a project-based investment, and $100 million for a blind-pool fund. Our target return is approximately 5.3%.”

“Real estate investments are worth 1.1 trillion won in commitment, accounting for about 40% of our global alternative assets. Infrastructure is 500 billion won.”

“We prefer core or core plus assets for real estate and infrastructure investment. Core and core plus assets make up about 70%, while value-add and opportunistic investments account for 30%.”

* Public Officials Benefit Association (Dong-hun Jang, CIO):

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“Overseas real estate investments are 1.5 trillion won, and overseas infrastructure assets are approximately 500 billion won.”

“We’re a relatively newcomer to global infrastructure investment market. We’d like to raise exposure to core assets aggressively. We focus on core and core plus strategies.”

“We make alternative investments across all asset types and use SMAs (separately managed accounts) aggressively.”

“Our ticket size per deal is 50 billion won to 100 billion won. Our target return is somewhere between 5 and 7%.”

“Our principle is indirect investment. We have a low risk profile.”

“We’re keen on co-investments and SMAs for alternative assets.”

ON PORTFOLIO ADJUSTMENT AND ASIA INVESTMENT

* KTCU (Kang):

“The spread on US mezzanine debts, which we mainly target, has narrowed sharply because of competition. But considering LIBOR’s rise and external uncertainties such as trade disputes and Brexit, mezzanine investments are likely to remain attractive for a while.”

“With competition for assets in western Europe and Australia leading to price rises and yield compression, we need to diversify new investments into other regions and sectors.”

“We have been diversifying by region and sector, including lending to an Asian logistics platform and to a Chinese business park and a equity investment in a Chinese outlet mall.”

“In Asia, we’re interested in logistics business. In China and Indonesia, we’re looking at retail business and multifamily assets, in particular.”

“Emerging markets have more growth potential. Low market transparency may be a restriction factor, but we expect to control such a risk in cooperation with partners.”

*Teachers’ Pension (Park):

“We have difficulty in finding suitable investment targets after real estate prices jumped. For the three to four years, we’ve been investing in mezzanines and value-add strategies.”

“Since the (global) financial crisis, we have never made a direct investment in Asia’s real assets, except for blind-pool funds. Exchange rates are the biggest restriction factor. Returns vary sharply, depending on the exchange rates at the time of entry and exit.”

“Despite such challenges, we will continue to boost investment in Asia in cooperation with global GPs because of their huge growth potential.”

“For real estate, we have been increasing mezzanines and value-add and opportunistic strategies in developed markets in the past three to four years.”

“Pricing and exit strategy are the most important factors for our decision making. We are diversifying into multifamily and logistics centers.”

“For infrastructure, we’ve been diversifying into value-add and opportunistic strategies for three years. We are preparing to diversify into infrastructure debts.”

“We are considering investing in subordinated tranches, which are ranked in the middle of capital structure to get stable cash yields and downside protection.”

* POBA (Jang):

“We beefed up our portfolio with real estate debts because most of our assets were equity investments in the past three years.”

“We will maintain the proportion of real estate for now, which accounts for about half of our alternative investments.”

“We have aggressively stepped up infrastructure investments in the past two to three years, which account for 6 to 7% both domestically and globally. We see no difficulty in lifting the proportion to as much as 10%.”

ON KEY FACTORS FOR GP SELECTION AND INTERNAL RESTRICTION

*Teachers’ Pension (Park):

“We look at non-quantitative factors seriously. We scrutinize if our interests can be aligned with GPs’, how long their keymen stay at their jobs and care about clients, and if they pay sufficiently for the keymen.”

“Lastly, we put great importance on how systematically they responded to a big external shock, whether they succeeded or failed in their response, if they examined the reasons for a failure and corrected any flaw, and if such a process is well-documented and manualized.”

“We have restrictions on direct infrastructure investment because most of infrastructure investments undergo the bidding process and have a huge deal size. They require LOC to investors in the middle of the auction, which we cannot meet. As an investor, we have many difficulties in sourcing and closing a deal abroad.”

“To overcome such an obstacle, we co-invest with global GPs by setting up a co-investment vehicle.”

By Dong-hun Lee

leedh@hankyung.com

<Edited by Yeonhee Kim>