cash rich korean institutional investors turning to overseas private equity to boost their returns...
TRANSCRIPT
Cash rich Korean Institutional Investors
turning to overseas Private Equity to boost their
returns
ZAINAB OUMERYEM
KOREAN INVESTORS HUNGRY FOR OVERSEAS INVESTMENTS
EXECUTIVE SUMMARY
SOUTH KOREAN INVESTORS FAST GROWING ASSETS
ALLOCATIONS TO ALTERNATIVES OVERSEAS LIKELY TO EXPAND
SOUTH KOREA LARGEST INVESTORS ON THE MOVE
CONCLUSION
BIBLIOGRAPHY
CONTENT
The Private Equity funds have raised $311bn in Capital worldwide during the three first quarters
of 2013, a record amount since 2008. By allocating more Capital to Private Equity funds,
institutional investors or Limited Partners have shown more confidence toward this investment
strategy. The other side of the picture is that competition to raise new funds is much tougher.
General Partners, particularly in Europe, are increasing their exposure to Non-Domestic investors.
Some cash rich investors, though, are seeking opportunities outside their traditional markets. South
Korea, an often underestimated country, has seen its institutional investors assets increase
dramatically in the past years and reach the point where the domestic markets became too small
for them to invest in. Among those, the Korea National Pension System, the largest Institutional
investor of the country, will triple its assets to reach $900bn by 2020. Korean Institutional Investors
will likely increase their allocations to Alternative strategies overseas as it appears to be a good
tradeoff between insuring higher returns, reducing the risk through diversification while avoiding to
create an asset bubble in the domestic markets.
International Asset Management firms like Blackrock, Wellington Management and American
Century Investments, have already started to add Korea Focused institutional executives and
sales teams in the past year.
Now, Private Equity Firms and more generally, Alternative focused firms, are likely to follow the
pace. Those who will be the first to adapt their strategies in order to better serve Korean investors
will benefit from the long-term increasing funds looking to be invested.
EXECUTIVE SUMMARY
Korea’s large Institutional Investors hold fast growing assets and are likely to invest in Alternative strategies overseas in the coming years
Projection of Pension Assets of Korea National Pension Fund (NPS)
*Source : NPF Actuarial Projection Report (2008-2078)(2008, NPS Research Institute)
Korean Pension Assets to peak
South Korea has experienced a proliferation of mutual funds, pension funds and insurance firms during the last decades
The Pension assets started an ascendant curve and are expected to peak in the next five years and stay at high levels for a decade or more driven by an upward trend of the working population
The National Pension System (NPS), the largest Pension Fund of the country and the fourth in the world is expected to triple its assets by 2020 to reach around $900bn
The National Pension System (NPS)
In this context, South Korea has seen its institutional investors assets increase dramatically in the
past years and reach the point where the domestic markets became too small for them to invest in
KOREAN INVESTORS FAST GROWING ASSETS
Investments in overseas alternatives is likely to increase as it appears to be a good tradeoff between
insuring higher returns, reducing the risk though diversification while avoiding to create an asset
bubble in the domestic markets
*Source : Central Bank of Korea
Evolution of Bank of Korea Base Rate
The current level of low interest rates of the country as well as the rest of the world is likely to push pension funds and insurance companies to include more profitable investments instead of highly rated bonds that they have traditionally targeted.
Low interest rates
Korean Institutional Investors assets are growing sharply. Some of them have started to invest
overseas several years ago. The tendency is likely to continue in the coming years, for three main
reasons:
The assets under management are increasing dramatically and exceeding the domestic market capabilities
Korean Assets to exceed domestic market capabilities
Korean Pension funds are under political and economic pressure to invest overseas to boost their return in order to ensure retirements of a population with one of the longest life expectancy and lowest fertility rates in the OECD countries
Korean Pension Funds under political and economic pressure
INVESTMENTS IN OVERSEAS ALTERNATIVES LIKELY TO
EXPAND
National Pension Fund has been established in 1988 to secure financial resources to pay back pension benefits for the insured such as Old-age Pension, Survivor Pension, and Disability Pension
Its assets have increased dramatically in the past years and are expected to further grow in the coming years
About the National Pension System (NPS)
*Source : The National Pension System
Evolution of the NPS Assets
International Presence
January 1988: Opening of Seoul Office
July 2011: Opening of New York Office
July 2012: Opening of London Office
Investments Overseas to Increase
The South Korean National Pension Fund has announced it will raise its investments overseas from 14% to 20% by 2016
Its assets are expected to triple by 2020 to reach $900bn
Overseas Infrastructure Applied to targets on long-term returns for overseas real estateOverseas Real Estate (NPI×45%) + (IPD Europe×30%) + ((Asia real GDP growth rate + Inf)×15%)+ (FTSE/NAREIT Global×10%)Overseas Private Equity MSCI AC World Index (ex-Korea, hedged-to-KRW) + 3.0%
*NCREIF Property Index (NPI) is a U.S. real estate index
**IPD Europe is a European real estate index launched by IPD
***FTSE/NAREIT Global is an index for real estate related securities such as REITs
Benchmark for Alternative Assets (as of 2012)
Domestic fixed incomeLess than 60%
Overseas fixed incomeLess than 10%
Domestic EquityMore than 20%
Overseas EquityMore than 10%
AlternativesMore than 10%
Projected Allocations by 2016
*Source : NPF 2012 Annual Report
*Source: National Pension Fund 2012 Annual Report
Benchmark for Alternative Assets
*Source : Korea Investment Corporation 2012 Annual Report
Evolution of KIC’ Assets Under Management (in $bn)
About Korea Investment Corporation (KIC)
Korea Investment Corporation (KIC) signed an investment management agreement with the Bank of Korea and the Ministry of Strategy and Finance in June and October of 2006, and began investing the entrusted assets in November 2006.
KIC’s mission is to preserve and enhance sovereign wealth for future generations. Its assets under management have grown significantly to reach $57bn as of 2012 up from $1.1bn in 2006 and $42.9bn in 2011. KIC specializes in overseas investments
July 2005: Opening of Seoul Office
July 2010: Opening of New York Office
December 2011: Opening of London Office
International Presence
*Source : Korea Investment Corporation press release
Private Equity 40%
$2.0bn- $4.0bn
Hedge Funds 30%
1.5bn – $3.0bn
Real Estate 30%
$1.5bn – $3.0bn
Total$5bn - $10bn
Projected Allocations by Asset Class - 2016
KIC announced last August it will increase holdings of Alternative strategies to 20% of its portfolio by 2016 up from 6.1% at the end of 2012 equivalent to $5bn to $10bn new investments
According to its Chief Investment Officer, the investments would be spread equally between the class of assets. 40% of the announced amount is expected to be invested in Private Equity, equivalent to $2bn to $4bn in total
Allocations To Alternatives overseas to increase
*Source: Korea Investment Corporation 2012 Annual Report
Benchmark for Alternative Assets
Hedge FundPrivate EquityReal Estate
G7 Inflation + 7%
Benchmark for Alternative Assets (as of 2012)
CONCLUSION
Korea’s Institutional Investors hold fast growing assets that they need to invest. Korean Pension
Funds, in particular, have seen their assets increase dramatically in the past years. These assets
are expected to peak in the coming five years and stay at high levels for a decade or more,
sustained by an upward trend of the working population.
The rapid aging population combined with the current low levels of interest rates are pushing
Korean Pensions Services and Mutual Funds to take risks and seek better returns. Other large
institutional investors experience the same challenge. All have in common their growing interest for
Alternative strategies, among which Private Equity overseas.
The largest institutional investors of the country have already included more allocations to
Alternatives overseas in their investments strategies. Among others, Korea’s largest institutional
investor, the National Pension Fund (NPS), will raise its investments overseas from 14% to 20% by
2016 while the sovereign wealth fund of the country, the Korea Investment Corporation (KIC), will
invest between $5bn and $10bn in overseas Alternatives by 2016.
More and more international Asset Management firms are turning to Korea Institutional Investors to
raise funds. The tendency is likely to continue among Alternatives focused firms in the coming
years.
• “Korea's NPS to boost alternatives exposure” Asian Venture Capital Journal, 17 June 2013
• “Firms bulking up sales staff to win won in S. Korea” Pensions & Investments Research center, April 1st, 2013
• The National Fund Service Management Report – 2012, 2011 & 2010
• The Korean Investment Corporation Annual Report – 2012, 2011 & 2010
• “Korea state fund to spend up to $10 billion on alternatives”, Bloomberg, August 9th 2013
• “Private Equity Global Report 2013” Bain & Company
• “Global Alternatives Report 2013” Preqin
• “South Korean pension to expand its foray into international assets”, the Financial Times, October 21st 2012
• “Mutual funds make a hit in South Korea”, April 17th 2008, New York Times
• “S.Korea KIC to boost private market investments”, August 24th 2010, Reuters
• “Korea’s major public funds are marching in”, May 31st 2012, Investments & Pensions Asia
• “Private Equity Eye – South Korea”, November 2012, SVG Advisors
• “S.Korea state pension fund to create foreign-currency account”, June 24th 2013, Reuters
BIBLIOGRAPHY