POBA to allocate $300 million to overseas PEF and PDF in H1; plans to raise exposure to foreign alternative assets

  • 2016-05-14

– Planned investment in foreign blind PEFs in 2016 double last year’s allocation

– To pick one asset manager in May to invest $220 million in Europe office buildings

– Seeks annual return of about 5% on Europe office building purchases

– Plans to pick two infrastructure investment funds soon for undisclosed sum

By Donghun Lee and Daehun Kim

South Korea’s Public Officials Benefit Association (POBA), a savings fund for local public officials in the country, will earmark $200 million for investments in foreign private equity funds (PEFs) and put an additional $100 million in private debt funds (PDFs) in the first half of this year, a source at the association said on May 2, 2016.

Separately, the association will pick an asset manager in May to allocate about $220 million (250 billion won) for buying core office buildings in major European countries. The plan of real estate investment comes on the heels of its allocation of 50 million euros (65.2 billion won) to a European property fund run by JPMorgan earlier this year.

“In the global perspectives, the property market in Europe is seen as undervalued,” said a source of the POBA. “Also, low interest rates and the undervalued euro may lead to currency gains when the euro appreciates going forward.”

The $200 million earmarked for overseas blind PEFs is double the amount POBA entrusted last year to three foreign PEF managers – Lexington Partners, Blackstone and Oaktree Capital. In 2016, POBA will allocate the combined $200 million to HabourVest (secondary investments), Pantheon, LGT (fund of funds), Hastings (mezzanine) and Partners Group (buyout). A second-phase review of the investment plan has been completed, and it is pending final approval from the POBA’s investment review committee and the chairman.

In addition, POBA will designate three asset management firms to invest $100 million in aggregate in foreign private debt funds, which will lend money for corporate M&A transactions on the conditions that borrowers offer management rights as collateral.

POBA, with assets under management (AUM) of about $7 billion (8.2 trillion won) at the end of 2015, puts around half of its assets in alternative investments. It is one of major savings funds in South Korea, along with the Korean Teachers’ Credit Union and the Military Mutual Aid Association, a military savings fund. POBA expects its AUM to expand by about 1 trillion won, or more than 10 percent, this year.

The association is seeking an annual return of about 5 percent on purchases of A-rated or higher-rated office buildings in Europe with the investment horizon of five to seven years. The target yield is far higher than South Korean government bond yields and bank deposit rates which have been hovering around 1.5 percent, on a par with the country’s base rate, or 7-day repurchase agreement rate. With respect to the impact of a June referendum in Britain on its possible exit from the European Union, POBA said it will address the Brexit issues in a preliminary agreement to be signed with a designated asset manager in June.

Going forward, POBA will continue to expand investments in overseas assets. It also plans to pick two offshore infrastructure investment funds in coming months, for which the size of a planned investment has not been disclosed.

“Korean institutional investors are increasing their asset allocations to alternative investments in the lack of suitable targets which can digest their snowballing investment assets at home,” said a financial investment industry source. “It will be not only POBA, but also a number of other local LPs that will continue to raise their exposure to foreign investments,” he added.