The National Pension Fund has significantly increased alternative investments in the first four months to April from a year earlier, which industry sources attributed to the NPS’ improved deal sourcing capability after forming alliances with global pension funds and asset managers.
Its alternative investments grew by a net 5.6 trillion won ($4.7 billion) in the January-April period from the end of last year, according to the NPS.
The net increase is more than twice as much as the $610 billion pension fund deployed in alternative assets every four months on average a year earlier.
In the whole of 2019, the net growth in the NPS’ alternative investments was about 7.6 trillion won.
The January-April number excludes the billion-dollar-level investment in a Portuguese toll road operator and a property redevelopment project in Manhattan, as well as the $2.3 billion joint property fund with Allianze SE.
Its cumulative alternative investments reached 89.9 trillion won as of the end of April, compared with 84.3 trillion won at the end of last year, according to the NPS.
Most of the net increase stemmed from overseas investments that accounted for 70%, given that the investment volume of domestic alternatives was little changed at 24.8 trillion won as of the end of March from three months before.
“Coronavirus restrictions made due diligence difficult on overseas assets, so many institutional investors and management companies are looking back at domestic assets,” said an asset management company source.
“Under the circumstances, NPS stands out among domestic institutional investors in overseas investment.”
NPS has formed strategic alliances with global funds and make co-investment in big deals to overcome employee shortages and the lack of information and expertise in overseas investment.
During the five business trips abroad since chief investment officer Hyo-joon Ahn took office in October 2018, he has met with global pension funds and sovereign wealth funds, including Canada’s CPPIB and Ontario Teachers’ Pension Plan, GIC and Temasek of Singapore, Dutch pension fund APG Asset Management NV and Japan Post, to discuss co-investments.
Previously, his predecessors had spent more time meeting asset managers on overseas business trips.
“Currently, we do not have enough capacity to source good deals to achieve satisfactory returns,” an NPS source told the Korean Investors. “We will diversify our deal sourcing channels by establishing partnerships with global institutions and improve our investment capability by building up co-investment experiences.”
Its recently announced deals, including the Portuguese toll road operator, were in the form of co-investments.
By the end of this year, it is aiming to raise the proportion of alternatives to 13% from 11.4% at the end of last year. That means it may see a net increase of about 10 trillion won in alternative investments for the remainder of the year.
As part of an effort to boost global investment, NPS abolished Korea-focused teams under the three investment divisions of private equity, real estate and infrastructure in January to place them in newly-created Asia teams.
The move followed the reorganization of its alternative investment division last year to classify them by asset class of real estate, infrastructure and private equity, instead of dividing them into domestic and overseas assets.
Additionally, NPS has shortened the decision-making process. It is now allowed to proceed with a co-investment, or a small-size investment of under $50 million, without seeking approval from its highest decision-making body led by welfare minister.
But a source familiar with NPS said that the pension scheme could not help but focus on large-scale overseas deals to deploy its growing assets and secure good returns.
It is also under pressure to avoid or delay depletion by bolstering investment returns. Under the current system, NPS is forecast to face depletion by 2057.
“To secure both profitability and stability from alternative investments that have severe information asymmetry, the key is to have access to more deals than others do. It is time for NPS to hire global investment specialists to rival global pension funds,” the source added.
Meanwhile, NPS picked five domestic private equity firms on June 30 to commit a combined 800 billion won: Macquarie Korea Asset Management Co. Ltd., Glenwood Private Equity, SkyLake Investment, IMM Investment Corp. and JKL Partners.
The selection of the large domestic private equity houses with solid track records signaled a shift in its focus toward stable yields amid coronavirus-related uncertainty, according to industry sources.
By Jung-hwan Hwang
<Edited by Yeonhee Kim>