Korean public officials’ fund picks mezzanine fund firms in closed bids

  • 2016-08-10

South Korea’s Public Officials Benefit Association (POBA) has preliminarily chosen three U.S.-based asset management firms of mezzanine funds in limited competition to invest a total of $120 million, expecting the selection method to help build networks with global fund houses, a source of the POBA said on August 9.

It is the first time for the savings fund for local government officials to pick a global alternative investment manager in a closed bid process.

“Among mezzanine fund management firms operating in the U.S., we had sent RFPs only to about 10 companies that scored high in the rate of investment returns, experience, fund formation timetable, etc. After screening their documents, we selected three companies,” said the POBA source. “Upon completion of due diligence, we will commit $40 million to each fund for a total of $120 million.” He declined to identify the fund companies before due diligence is finished.  

The introduction of the limited competition underscores POBA’s efforts to establish relationships with top global management firms in a more active way, after it faced intense competition and high entry barriers to new asset classes such as timber and farm lands in its recent attempts to diversify portfolio.

“As liquidity has surged around the world, a few popular funds are closed as soon as talk of the fund formation circulates,” the source said. “In order to invest in (products of) top asset management firms, institutional investors must approach them first.”

The source added: “We concluded that for small- to medium-sized institutional investors such as POBA to build relationships with top global management companies, limited competition that gives only a few selected companies the opportunity to receive investments is an appropriate method.”

POBA expects to earn about 10~15% annual returns from this round of commitments to mezzanine funds. Mezzanine funds invest in mid-risk products such as convertible or exchangeable bonds, which are in the middle ground between bonds and stocks, and seek stability and profitability simultaneously.

Entry barriers to alternative investments have been raised in the low interest environment around the world, and pension funds of developed countries have already formed “their own league” in promising niche markets, POBA’s CIO Dong-hun Jang said in a contribution to Maeil Business Newspaper last month. He advised domestic institutional investors to join the league of those established foreign funds to expand overseas investments.

POBA, with more than $7 billion of assets under management, is accelerating diversification into various investment vehicles, including catastrophe bonds. Jang had said in an interview with the Korea Economic Daily in May that alternative investments may exceed half of its total AUM by the end of this year.

By Donghoon Lee

leedh@hankyung.com

<Edited by Yeonhee Kim>