Korean LPs prioritize yield-generating alternatives - AVCJ Forum

"Most CIOs in groups like ours have three-year terms. If I say I invested $1 billion in buyouts [the board] is not interested; they are only interested in how much we have earned and so we have to get more cash coupons. That is why we are here," Taebok Kang, a senior global portfolio manager with Korean Teachers' Credit Union (KTCU), told the AVCJ Korea Forum.

KTCU has KRW7 trillion ($6.2 billion) in alternatives, of which KRW4 trillion is deployed with overseas managers, and the bulk of it is in infrastructure and real estate. Overall assets under management are increasing at a rate of KRW1 trillion a year and a drive for better returns mean the group is likely to commit more to overseas alternatives. Kang expects cash flow-generating assets to be prioritized.

Korea Teachers' Pension is in a similar position. Of its KRW14 trillion in assets, 16% is in alternatives, with KRW1.2 trillion committed to overseas managers alone. Private equity and real estate each account for 45% of this. Taehyeong Kim, a senior portfolio manager with the fund, noted that the major public pension funds are assessed by the government on an annual basis, so there is an emphasis on cash flow.

"You cannot ignore the fact that we have our own benchmarks and target returns," Kim said. "Within a year we have to realize a certain level of returns and that means private debt, whether senior or mezzanine."

This doesn't mean private equity is unworkable, but LPs have to think carefully about their exposure, particularly when building relatively young overseas alternatives portfolios. For example, KTCU and Teachers' Pension both began by focusing on international secondaries and then entered the co-investment space through separate accounts and dedicated co-investment funds.

Hyundai Marine & Fire Insurance launched its overseas private equity program about 18 months ago - it has KRW29 trillion under management, 25% of which is in alternatives, and is adding KRW3-4 trillion in assets every year. Secondaries were also the starting point, followed by fund-of-funds and then private debt.

"Secondaries are good because we can realize earnings early on," said Jong-Kwan Lee, an investment manager for the insurer. "For people like us who are starting programs there are no [existing] private equity vintages... when you don't have that track record it is challenging."

While these investors are becoming more global in their allocations, internal resources are usually quite limited, which means teams are small and inexperienced. The due diligence process for international managers is much like those of other LPs - with a focus on track record, strategy, and so on - but they also take comfort from GPs that can communicate in Korean.

"It's a long-term relationship, like choosing your spouse or boyfriend or girlfriend. And it is illiquid by nature," said Kim of Teachers' Pension. "Having a Korea office and local employees or having Korean speakers is important."

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