Expect Korea wave into alternatives

Institutional investors from South Korea are going to become major allocators to global alternative investments, says the former head of real-asset investments at Korea Post.

Speaking at a recent institutional forum in Tokyo organised by AsianInvestor, Song In-kyu says that worries about risk in equity markets and poor returns on global fixed income mean alternatives will play a growing role in overseas allocations.

Song left the $90 billion Korea Post last month to join PricewaterhouseCoopers in Seoul.

Today, Korea Post allocates 4% to alternatives, while the National Pension Service has an 8% allocation, and some pension funds have budgeted up to 15%. But all of these allocations are on the rise.

Song notes that Korean insurance firms collectively have about $400 billion in assets, while pension funds have $650 billion. Each category sees net contributions of at least $50 billion each year.

“The NPS already has $340 billion,” Song notes. “Where can the money go?”

In addition to the lack of interest in adding global sovereign debt or equities, big funds also want access to real assets. The NPS, for example, has been active in real estate and infrastructure. NPS, Korea Post and Korea Investment Corporation have been investing in private equity. At some point, smaller pension funds and the insurance companies will follow suit, Song predicts.

Hedge funds are the most difficult asset class, as NPS is barred from these by its statutes, and only Korea Post and KIC are investing in these in a meaningful way. But the increasing acceptance of hedge funds among Korean regulators means retail investors are starting to tap funds of hedge funds, and at some point the NPS will probably be allowed to invest in these as well.

So far the biggest beneficiaries have been domestic private-equity and real-estate groups. Overseas alternatives are seen as high risk. However, institutional investors learned hard lessons in 2008 and 2011, and they are coming around to the idea that global alternatives are desirable to diversify portfolio risk, rather than simply to gain returns.

As a result, as Korean institutions broaden their mandates, they will begin with the senior-most tranches in alternative capital structures. Then they will broaden into mezzanine debt, and then equity. Song says distressed asset buying (in the sense that it is buyers, not the assets themselves, in distress) will become a more popular theme. The KIC has pioneered this for Korean investors.

The NPS, meanwhile, has been the early mover in infrastructure, at first domestically and now overseas. Initial results have been positive so Song expects more institutions to look at this asset class. Opportunities will be found both by tapping distressed sellers from Europe and the US, as well as trying to get aboard the North American shale gas revolution. European bank recapitalisation efforts will also throw up more opportunities as they sell non-core assets, particularly in markets like Australia, where European banks are in retreat.

“Even Japan investments will become attractive,” Song says, acknowledging the local audience at the AsianInvestor event. He says Japanese assets can serve as useful diversifiers or stabilisers in an international portfolio, notably in real estate, either direct or through real-estate investment trusts.