Korean LPs adapt to the new normal – AVCJ Forum

Buyouts were highlighted for withstanding the trials of the past 18 months better than expected, but investors see positives across multiple strategies within private markets.

Wansun Park, head of the overseas alternative investment team at Fubon Hyundai Life Insurance, noted that aggressive stimulus policies helped the leveraged loan market – including collateralized loan obligations (CLO) – overcome initial volatility. Most funds returned to pre-COVID-19 levels by the end of last year. Private debt still slightly underperformed its benchmark, while private equity outperformed.

Fubon Hyundai has KRW70 trillion ($59.2 billion) in assets, of which 35% is in alternatives. There is a general objective to increase international exposure, but private debt and real estate remain the priority areas, given the desire for consistent, yield-based distributions.

In the direct lending space, managers acted preemptively to minimize any damage, added Daewon Kim, a vice president in the liability-driven investment division at Hanwha Asset Management. Kim also saw buyouts fare better than expected, partly due to cost-cutting and capital cures in trouble-hit sectors. Special situations and distress promised much but have so far failed to deliver, he said. 

Hanwha focused on distress, direct lending, and secondaries this year, but plans to be more active in senior debt in the EU and US for 2022.

Buyout exposure is also on the agenda. Hanwha has KRW100 trillion in assets under management, with a 20% allocation to alternatives. It started making private equity fund commitments as recently as four years ago, so the program is expected to start generating meaningful distributions from 2021.

On a sector basis, technology tops the list, given rising valuations and expanding exit options. Software has seen significant growth during the pandemic, to the point that has become a core coverage area for many GPs, Kim said.

“We will look to make commitments to funds with a proven track record in this sector while pursuing co-investment opportunities in attractive deals,” he noted.

Korean Teachers’ Credit Union (KTCU), which has approximately KRW53 trillion in assets, backs private equity funds with a view to securing co-investment opportunities. It has participated as an anchor investor in a string of project funds, achieving satisfactory returns. There is also KRW2 trillion in blind pool funds, which represents its primary focus within private equity.

Global assets account for roughly half of the alternative investment portfolio. Earlier this year, KTCU participated alongside STIC Investments in a Southeast Asia-based ride-hailing and local services platform Grab. Domestic co-investments include industrial gases producer Air First – formerly Linde Korea – with IMM Private Equity.

“We like to hear suggestions from GPs regarding great investment opportunities,” said Soobin Kim, a senior manager at KTCU.

Hyundai Marine & Fire Insurance, meanwhile, has considerable exposure across the alternatives spectrum, from private debt and secondary mezzanine to buyouts and growth equity. One-quarter of its $40 billion in assets is in alternatives, with 50% in real estate and the remainder split equally between infrastructure and private equity.

The insurance firm responded to the pandemic by focusing on private debt. More recently, it has increased allocations to buyout managers, chiefly in the US.

There are plans to accelerate deployment following an increase in distributions from existing GP relationships, said Innchul Oh, a senior manager for private equity at the firm. Rather than invest in large buyout funds, Hyundai Marine wants to build a closely held portfolio of growth equity and venture capital managers with exposure to high-growth areas such as technology and healthcare.

Travel restrictions have caused minimal disruption to the GP-LP relationship, investors claim. According to Oh at Hyundai Marine, it is easier to communicate with in-demand GPs through virtual channels. “We will continue engaging in active communication with GPs for deal opportunities,” he said.

Within the pension fund community, steps may also be taken to smooth the process from communication to deployment. Typically, public notices are issued inviting private equity firms to compete for mandates under specific strategies, and then conducted reviews of potential candidates.

Kim of KTCU suggested this could be replaced by a more flexible approach, whereby established managers are fast-tracked. KTCU would still run open contests when selecting new GPs, but private equity firms it knows well – including those already represented in the portfolio – could be moved into partnership programs. Negotiations would be one-to-one, allowing the pension fund to be less regimented in its deployment.

At the same time, with global private equity firms increasingly interested in raising capital from Korean institutional investors, more could be done to target these groups effectively, Fubon Hyundai’s Park added. Steps include hiring local investor relations professionals to coordinate fundraising efforts.

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• Topics
• North Asia
• Fundraising
• LPs
• Buyout
• Credit/Special Situations
• Venture
• Growth
• Performance
• South Korea
• AVCJ Events
• Korean Teachers' Credit Union (KTCU)
• Hyundai Marine & Fire Insurance
• Hanwha Asset Management
• Fubon Hyundai Life Insurance