KOREAN INVESTORS HUNGRY
FOR OVERSEAS INVESTMENTS
Cash rich Korean Institutional Investors
turning to overseas Private Equity to
boost their returns
ZAINAB OUMERYEM
CONTENT

EXECUTIVE SUMMARY

SOUTH KOREAN INVESTORS FAST GROWING ASSETS

ALLOCATIONS TO ALTERNATIVES OVERSEAS LIKELY TO EXPAND

SOUTH KOREA LARGEST INVESTORS ON THE MOVE

CONCLUSION

BIBLIOGRAPHY
EXECUTIVE SUMMARY
Korea’s large Institutional Investors hold fast growing assets and are likely to invest
in Alternative strategies overseas in the coming years
The Private Equity funds have raised $311bn in Capital worldwide during the three first quarters
of 2013, a record amount since 2008. By allocating more Capital to Private Equity funds,
institutional investors or Limited Partners have shown more confidence toward this investment
strategy. The other side of the picture is that competition to raise new funds is much tougher.
General Partners, particularly in Europe, are increasing their exposure to Non-Domestic investors.
Some cash rich investors, though, are seeking opportunities outside their traditional markets.
South Korea, an often underestimated country, has seen its institutional investors assets increase
dramatically in the past years and reach the point where the domestic markets became too small
for them to invest in. Among those, the Korea National Pension System, the largest Institutional
investor of the country, will triple its assets to reach $900bn by 2020. Korean Institutional
Investors will likely increase their allocations to Alternative strategies overseas as it appears to be
a good tradeoff between insuring higher returns, reducing the risk through diversification while
avoiding to create an asset bubble in the domestic markets.
International Asset Management firms like Blackrock, Wellington Management and American
Century Investments, have already started to add Korea Focused institutional executives and
sales teams in the past year.
Now, Private Equity Firms and more generally, Alternative focused firms, are likely to follow the
pace. Those who will be the first to adapt their strategies in order to better serve Korean investors
will benefit from the long-term increasing funds looking to be invested.
KOREAN INVESTORS FAST GROWING
ASSETS
In this context, South Korea has seen its institutional investors assets increase dramatically in the
past years and reach the point where the domestic markets became too small for them to invest in
Korean Pension Assets to peak
The National Pension System (NPS)
 South Korea has experienced a proliferation of
mutual funds, pension funds and insurance
firms during the last decades
 The National Pension System (NPS), the
largest Pension Fund of the country and the
fourth in the world is expected to triple its
assets by 2020 to reach around $900bn
 The Pension assets started an ascendant
curve and are expected to peak in the next
five years and stay at high levels for a decade
or more driven by an upward trend of the
working population
Projection of Pension Assets of Korea National
Pension Fund (NPS)
*Source : NPF Actuarial Projection Report (2008-2078)
(2008, NPS Research Institute)
INVESTMENTS IN OVERSEAS
ALTERNATIVES LIKELY TO EXPAND
Korean Institutional Investors assets are growing sharply. Some of them have started to invest
overseas several years ago. The tendency is likely to continue in the coming years, for three main
reasons:
Korean Assets to exceed domestic market
capabilities
Low interest rates
 The assets under management are increasing
dramatically and exceeding the domestic
market capabilities
 The current level of low interest rates of the
country as well as the rest of the world is
likely to push pension funds and insurance
companies to include more profitable
investments instead of highly rated bonds
that they have traditionally targeted.
Evolution of Bank of Korea Base
Rate
Korean Pension Funds under political and
economic pressure
 Korean Pension funds are under political and
economic pressure to invest overseas to
boost their return in order to ensure
retirements of a population with one of the
longest life expectancy and lowest fertility
rates in the OECD countries
*Source : Central Bank of Korea
Investments in overseas alternatives is likely to increase as it appears to be a good tradeoff between
insuring higher returns, reducing the risk though diversification while avoiding to create an asset
bubble in the domestic markets
About the National Pension System (NPS)
 National Pension Fund has been established in
1988 to secure financial resources to pay back
pension benefits for the insured such as Old-age
Pension, Survivor Pension, and Disability Pension
Evolution of the NPS Assets
 Its assets have increased dramatically in the past
years and are expected to further grow in the
coming years
*Source : The National Pension System
International Presence
 January 1988: Opening of Seoul Office
 July 2011: Opening of New York Office
 July 2012: Opening of London Office
Investments Overseas to Increase
 The South Korean National Pension Fund has
announced it will raise its investments overseas
from 14% to 20% by 2016
Projected Allocations by 2016
Alternatives
More than 10%
Overseas Equity
More than 10%
 Its assets are expected to triple by 2020 to reach
$900bn
Domestic Equity
More than 20%
Overseas fixed income
Less than 10%
Domestic fixed income
Less than 60%
*Source : NPF 2012 Annual Report
Benchmark for Alternative Assets
Benchmark for Alternative Assets (as of 2012)
Overseas Infrastructure
Overseas Real Estate
Overseas Private Equity
Applied to targets on long-term returns for overseas real estate
(NPI×45%) + (IPD Europe×30%) + ((Asia real GDP growth rate + Inf)×15%)+ (FTSE/NAREIT Global×10%)
MSCI AC World Index (ex-Korea, hedged-to-KRW) + 3.0%
*NCREIF Property Index (NPI) is a U.S. real estate index
**IPD Europe is a European real estate index launched by IPD
***FTSE/NAREIT Global is an index for real estate related securities such as REITs
*Source: National Pension Fund 2012 Annual Report
About Korea Investment Corporation (KIC)
 Korea Investment Corporation (KIC) signed an
investment management agreement with the Bank
of Korea and the Ministry of Strategy and Finance
in June and October of 2006, and began investing
the entrusted assets in November 2006.
Evolution of KIC’ Assets Under Management
(in $bn)
 KIC’s mission is to preserve and enhance sovereign
wealth for future generations. Its assets under
management have grown significantly to reach
$57bn as of 2012 up from $1.1bn in 2006 and
$42.9bn in 2011. KIC specializes in overseas
investments
*Source : Korea Investment Corporation 2012 Annual Report
International Presence
 July 2005: Opening of Seoul Office
 July 2010: Opening of New York Office
 December 2011: Opening of London Office
Allocations To Alternatives overseas to increase
 KIC announced last August it will increase holdings of
Alternative strategies to 20% of its portfolio by 2016 up
from 6.1% at the end of 2012 equivalent to $5bn to
$10bn new investments
Projected Allocations by Asset Class 2016
Private Equity 40%
Real Estate 30%
$2.0bn- $4.0bn
$1.5bn – $3.0bn
 According to its Chief Investment Officer, the investments
would be spread equally between the class of assets. 40%
of the announced amount is expected to be invested in
Private Equity, equivalent to $2bn to $4bn in total
Total
$5bn $10bn
Hedge Funds 30%
1.5bn – $3.0bn
*Source : Korea Investment Corporation press release
Benchmark for Alternative Assets
Benchmark for Alternative Assets (as of 2012)
Hedge Fund
Private Equity
Real Estate
G7 Inflation + 7%
*Source: Korea Investment Corporation 2012 Annual Report
CONCLUSION
Korea’s Institutional Investors hold fast growing assets that they need to invest. Korean Pension
Funds, in particular, have seen their assets increase dramatically in the past years. These assets
are expected to peak in the coming five years and stay at high levels for a decade or more,
sustained by an upward trend of the working population.
The rapid aging population combined with the current low levels of interest rates are pushing
Korean Pensions Services and Mutual Funds to take risks and seek better returns. Other large
institutional investors experience the same challenge. All have in common their growing interest for
Alternative strategies, among which Private Equity overseas.
The largest institutional investors of the country have already included more allocations to
Alternatives overseas in their investments strategies. Among others, Korea’s largest institutional
investor, the National Pension Fund (NPS), will raise its investments overseas from 14% to 20%
by 2016 while the sovereign wealth fund of the country, the Korea Investment Corporation (KIC),
will invest between $5bn and $10bn in overseas Alternatives by 2016.
More and more international Asset Management firms are turning to Korea Institutional Investors
to raise funds. The tendency is likely to continue among Alternatives focused firms in the coming
years.
Zainab Oumeryem
ESCP Europe
oumeryemzainab@escpeurope.eu
http://www.linkedin.com/in/zainaboumeryem
BIBLIOGRAPHY
•
“Korea's NPS to boost alternatives exposure” Asian Venture Capital Journal, 17 June 2013
•
“Firms bulking up sales staff to win won in S. Korea” Pensions & Investments Research center, April 1st, 2013
•
The National Fund Service Management Report – 2012, 2011 & 2010
•
The Korean Investment Corporation Annual Report – 2012, 2011 & 2010
•
“Korea state fund to spend up to $10 billion on alternatives”, Bloomberg, August 9th 2013
•
“Private Equity Global Report 2013” Bain & Company
•
“Global Alternatives Report 2013” Preqin
•
“South Korean pension to expand its foray into international assets”, the Financial Times, October 21st 2012
•
“Mutual funds make a hit in South Korea”, April 17th 2008, New York Times
•
“S.Korea KIC to boost private market investments”, August 24th 2010, Reuters
•
“Korea’s major public funds are marching in”, May 31st 2012, Investments & Pensions Asia
•
“Private Equity Eye – South Korea”, November 2012, SVG Advisors
•
“S.Korea state pension fund to create foreign-currency account”, June 24th 2013, Reuters