Korean LPs: A targeted market

The little red taxis scooting across the interactive map plot five possible approaches to the National Pension Service of Korea's (NPS) international center in Seoul. The routes displayed on the fund's website are well-trodden paths for overseas private equity firms. The foyer of the building itself is akin to a United Nations of fundraising - "Everyone is there, everyone wants to market to NPS," one GP observes.

The attraction is clear. NPS had KRW446 trillion ($439 billion) in assets as of June 2014, of which 9.4% was in alternatives. Last year the fund increased its target allocation to 11.3%. This could mean an additional KRW153 trillion is pumped into alternatives over the next 16 years as NPS' asset base grows to KRW1,732 trillion by 2030.

Korea is an increasingly popular stopping point for international GPs on the fundraising trail, and not only because of NPS. A number of other institutions are building up their private equity programs - to a certain extent following NPS' lead - but they remain relatively untapped and challenging to address.

"Korea is like an iceberg. The tip is very visible but getting to the bit below the water is a cost benefit issue," says Steve Kim, CEO of local asset manager Castling Group. "Broadly speaking, there are a handful of players at the top and the big elephant is NPS. Then there are a lot of smaller players with structural issues and language barriers. It doesn't feel like they are ready to make a meaningful move into this asset class just yet."

Across the tiers

NPS shares the top tier with Korea Investment Corporation (KIC), and some would add Korea Post as well. As of April 2014 KIC had a 10% allocation to private equity, real estate and hedge funds out of a total corpus of $72 billion. New CIO Heung-Sik Choo has said he wants alternatives exposure to reach 20% over the next 10 years to counterbalance expected lower returns from traditional asset classes.

Given the rapid ramp up in its asset base, NPS in particular is going to cement its position as a significant private equity player. The question is how efficiently its portfolio will develop. As one fund-of-funds LP notes, NPS faces the "problem" of having too much capital to deploy as it seeks to keep pace with the growth of its asset base, which puts a strain on internal resources.

While some functions can be outsourced to third-party managers, NPS has moving into co-investment and building up its direct investment capabilities. The greater risks in these areas can come back and bite you, although several industry participants say they have yet to see the likes of NPS and KIC take a hit yet.

Below the top tier, Kim's iceberg theory to a certain extent plays out. According to the Asia investor relations head of a mid-sized global PE firm, there are around 150 investors in the region actively committing to the asset class and he has covered about 60% of the market. However, about 90% of the capital he has raised in the region comes from the largest 5-10 LPs.

Strategies in the placement agent community vary but an independent practitioner might only have a couple of realistic targets in Asia's less mature markets. At the same time, the immediate need to communicate with known investors but be balanced against the longer-term objective of cultivating new sources of capital.

"You can ignore the smaller players but because KIC and NPS have invested heavily over the years their capacity to support additional new managers is sometimes questionable," says Vincent Ng, partner at placement agent Atlantic Pacific Capital.

Alongside Korea Post and Korea Teachers' Pension are insurers such as Samsung Life and Hanwha Life. The list is filled out by the likes of Korea Teachers' Credit Union, Military Mutual Aid Association, the Employment Insurance Fund, the Public Officials Benefit Association, and the Construction Workers Mutual Aid Association.

These groups' appetite for PE varies, but many are expected to become more active participants in overseas funds as they seek diversity in terms of asset class and geography. Getting to them, however, can be a laborious process.

Unorthodox approach

Rather than track a sector over several years and identify 2-3 attractive managers, Korean institutions tend to decide on an area of focus and then invite applications from managers that meet certain criteria in terms of fund size, tenure and local registration, and sometimes expected fees and returns as well.

A deadline is set for the submission of documentation and the GP or agent must also reach an agreement with a local securities firm to act as an intermediary (NPS and KIC are exceptions to this rule). It is followed by interviews before the LP makes a final decision.

The system creates a natural bias towards groups that can accommodate the mandate - because they are fundraising anyway or they offer SMAs - and meet the criteria. It could result in LPs missing out on the best managers.

The approach ties into wider frustrations expressed by Kim of Castling at investors' attitude towards the asset class.

"We met with a group that did a secondary vehicle in 2012 when everyone and their mother was doing secondaries," he says. "One of the investment professionals said he liked secondaries because there was zero chance of not making money; he was adamant about it. We talked to them about manager selection and diversification and they just said they didn't believe in those things."

Kim doesn't expect this approach to change for a generation, or at least not until institutions offer better salaries and bring in people with the right kind of experience.

A number of GPs have set up offices in Korea, which can help bypass bureaucracy but is no guarantee of an allocation. The strength of the relationship, particularly with LP teams that might be small in number, is more important. "You have to be drinking with them, understanding them," adds Atlantic Pacific's Ng. "You can also provide global markets intelligence that they may not have access to because they have language issues or have limited ability to travel."

In this way, there is a selection bias towards GPs who visit, but this isn't restricted to Korea. "It all comes down to individual relationships," the fund-of-funds LP adds. "They have to like you."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• South Asia
• LPs
• South Korea
• LPs
• National Pension Service (Korea)
• Castling Investment Group
• KIC