Fundraising: Cracking the Korean LP

An investors relations executive with a global private equity firm once told AVCJ there are around 150 investors in Asia actively making LP commitments to funds. About 90% of the capital he had raised in the region to that point came from the largest 5-10 players. While Korea Post might claim to space in the tip of the domestic LP universe, the National Pension Service (NPS) and Korea Investment Corporation (KIC) are usually the primary targets. And why wouldn't they be?

NPS increased its alternatives allocation from 9.4% to 9.9% over the course of 2014 as total assets grew by 10.3% to reach KRW470 trillion ($435 billion). Of the KRW46.7 trillion in alternatives, KRW22.2 trillion was deployed domestically and KRW24.5 trillion globally - the first time the latter has accounted for the majority. It had a further KRW4.93 trillion in infrastructure and KRW12.2 trillion in real estate.

The pension fund only started its domestic alternative program in 2002 and first went offshore in 2005. By 2010, it was allocating 5.8% to the asset class and the target for 2014 was 11.3%, up from 10.6% the previous year. The significance of NPS is captured by its overall asset growth rather than the steady increase in its private equity allocation.

The fund is expected to exceed KRW500 trillion this year, KRW847 trillion in 2020 and KRW2.56 trillion in 2043. Assuming no change in the percentage allocation, the KRW46.7 trillion committed to alternatives at the end of 2014 would be more than KRW253 trillion by 2043.

KIC is in some respects even more ambitious. In a speech marking the 10th anniversary of the sovereign wealth fund's formation in June, the CEO drew comparisons to the approaches taken by Yale University and Canada Pension Plan Investment Board as he suggested that the alternatives allocation could reach 50%, a massive jump from the current 8%. It is expected to stand at 15% by the end of this year.

KIC had $84.7 billion in assets at the end of 2014, of which $6.8 billion was deployed in alternatives. It had $3.2 billion in private equity - up from $1.08 billion in 2012 - and then $1.9 billion in hedge funds and $1.5 billion in real estate. It began investing in the asset class are recently as 2009.

While these groups' plans to deepen their exposure to private equity will certainly bring plenty of GPs to their door, expansion on this scale can be problematic. GP feedback on how NPS and KIC approach the asset class is generally positive - China Investment Corp. still tends to be the most readily criticized of the Asian sovereigns - but internal resources, unless supplemented, will come under pressure.

Any group deploying increasingly large sums must be careful in picking managers and minimize the risk of insufficient vintage diversification (and from a GP perspective, there is a danger that an LP that has invested heavily will suddenly cut back). If there is a co-investment or direct investment program on top of this, a small team would be even more stretched.

Finally, there is the issue of compensation. An expanding LP needs talented executives to offer direction, but if the salaries on offer are not competitive with market rates - at mid-level as well as senior level - recruitment will be difficult. Where groups have a deficit in terms of institutional memory, they should pay a premium to bring it in from outside.

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• Topics
• Fundraising
• LPs
• North Asia
• Fundraising
• LPs
• South Korea
• National Pension Service (Korea)
• KIC