South Korea’s Tiger Alternative Investors Co. Ltd has raised about $100 million from domestic retirement funds and insurance firms to invest in senior debt of a US structured fund backed by shares of US-based business development companies (BDCs), according to investment banking sources on June 30.
With the investment, Tiger Alternative became the first Korean asset manager to invest in a BDC-backed structured fund of the US.
For the fundraising, Tiger Alternative set up a domestic vehicle with a five-year maturity. The senior tranche loan is expected to generate an annual return of 6-7%, compared to the usual 10 percent dividend yields from shares of BDCs.
Along with the interest income, the structured fund investor will collect principal repayment and capital gains in the event of a future share sale.
If the share price drops at the time of the sale, then junior investors will take on the loss. However, if the loss exceeds the investment, then it may also affect senior tranche investors.
“This fund was welcomed by investors because it will keep their financial soundness indicators such as risk-based capital ratio intact while providing high returns,” said a source at Tiger Alternative.
A business development company is created to invest in small and medium-sized companies and typically traded on stock exchanges. It is also a type of closed-end fund that makes investments in developing and financially distressed firms and tends to pay high dividend yields.
BDCs must invest at least 70 percent of its loan assets to private companies or listed companies that have a market cap below $2.5 trillion. Also, it will be exempt from corporate income tax if over 90 percent of its distributable profits are allocated to shareholders.
While it is similar to a private debt fund, the difference is that BDCs’ shares are publicly traded thereby providing a transparent disclosure of its investment portfolio and performance.
Meanwhile, there is movement in South Korea to adopt BDCs as a measure to increase capital supply for small and medium-sized companies through the capital market instead of the existing banking sector.
Earlier in March, the Financial Services Commission shared its pre-announcement of legislation for BDC-related policy and guidelines.
Tiger Alternative, founded in December 2018, has a diversified portfolio including real estate, M&A finance and structured finance. Earlier this year, the firm invested approximately $200 million into California-based UC Davis’ housing assets. Since its inception, the firm has grown to 3.23 trillion won ($2.7 billion) as of March this year.
By Jung-hwan Hwang
<Edited by Danbee Lee>