Korean pension funds relax due diligence to restart alternative investment

  • 2020-07-17

South Korean pension schemes and sovereign wealth fund KIC have recently restarted overseas alternative investments that had been suspended due to the pandemic by replacing on-site visits with video conferencing meetings, or skipping due diligence.

Amid travel restrictions, the move comes as the regulatory Financial Supervisory Service is stepping up scrutiny of overseas alternative investments led by domestic brokerage companies and asset managers.

The regulatory move, triggered after some real estate funds incurred heavy losses from overseas investments, is likely to drive Korean pension plans to turn to global asset managers for overseas investment for the time being.

In April, Korea Investment Corporation (KIC) revised internal rules to replace due diligence on investment targets with video conferences or conference calls in cases where physical visits are not allowed, a KIC source told the Korean Investors on July 16.

The Korean Teachers’ Credit Union (KTCU) has recently drawn up a new guideline on overseas alternative investment to conduct due diligence via video conferencing platforms to commit to global blind pool funds.

In detail, the $25 billion retirement fund is now able to replace on-site visits with video conferencing meetings to commit to a new investment fund, with conditions attached: the fund should be managed by an investment firm to which KTCU had committed before and must receive commitments from at least two global pension funds.

The exception to the physical due diligence applies only to top 50 private equity firms, based on Prequin’s data.

In comparison, the Public Officials Benefit Association and MG Korean Federation of Community Credit Cooperatives with $50 billion of assets have decided to restart overseas investments by skipping due diligence or replacing it with video conferencing platforms on a case-by-case basis. They have not introduced any guideline on due diligence, however.

Other unidentified retirement funds in Korea have invested in overseas real estate sold down by a brokerage company before conducting due diligence. They also have conditions attached to cancel the investment and sell it back to the brokerage house when a due diligence study reveals details that the seller fails to explain.

Meanwhile, the National Pension Service (NPS) has been beefing up alternative investments at a faster pace than last year, undeterred by coronavirus.

NPS is estimated to have poured 8 trillion to 9 trillion won ($6.6 billion to $7.5 billion) into overseas alternatives in the first half of the year, including re-investments of matured funds.

In the January-March period, the $610 billion pension scheme posted an increase of 4.8 trillion won in overseas alternative investments from a year earlier, including reinvestments.

The net 5.6 trillion won increase in January-April alternative investments, reported earlier this month, included both domestic and overseas portfolios.

In the second quarter, NPS joined forces with Dutch pension fund APG Asset Management NV and Swiss Life Asset Management AG to acquire a majority of a Portugal’s toll road operator for 3 billion euros and agreed to launch a $2.3 billion property fund with Germany’s Allianz SE to invest in core real estate in Asia.

NPS declined to give details on its due diligence guidelines on overseas investment.

By Hyun-il Lee

hiuneal@hankyung.com

<Edited by Yeonhee Kim>

(Photo: Getty Images Bank)