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THE INVESTOR
September 26, 2020
Big Reunion

Deals

COVID-19 changing how Korean LPs think about infrastructure bet

  • PUBLISHED :September 09, 2020 - 18:14
  • UPDATED :September 10, 2020 - 14:30
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Even before the pandemic, South Korean institutional investors pursued safe bets in infrastructure investment, given their tendency to work with top-tier external partners to manage their money and to join the final round of fundraising for those external partners.

They became more conservative in the wake of COVID-19, representatives of Korean institutional investors said on Sept. 8 at Infrastructure Investor Seoul Summit Virtual Experience 2020, hosted by the London-based financial intelligence firm PEI.

The virus is hampering efforts to venture into new partnerships with fund managers, to conduct due diligence for cross-border deals and to determine the proper valuation of the assets in the market, they said.

The institutional investors usually serve as “limited partners” in the finance world and sign contracts with “general partners,” or external fund managers that bear full responsibility for managing limited partners’ money.

To fund managers who were envisioning a new chance for general partners of Korean institutional investors, the indications in the latest virtual forum might sound frustrating, as the limited partners tend to stick to the current pool of external partners with strong reputation. 

Lee Jang-hwan, managing director and head of financial investment at Lotte Non-Life Insurance, said that for the time being it would focus on the relationship with top-tier general partners by the size of assets they were managing and their track records.

“It is hard to convince investment committee members especially for new general partners,” Lee said. “This is the reality.”

The coronavirus rather raises the need for Lee to strengthen ties with existing general partners, he added.

The virus is also pushing the existing general partners under renewed pressure as some institutional investors are reviewing the fund managers’ operational capacity.

“The coronavirus row gives us the opportunity to reevaluate external fund managers’ operation capability, as the coronavirus gave us an idea of how the managers deal with the crisis and report the consequence of it to limited partners,” said Lee Jin-ho, head of global real assets at the Postal Insurance Bureau of Korea Post.

On the other hand, a local fund manager pointed to an inevitable need for institutional investors to diversify the pool of external partners, as the pandemic is likely to persist and new capital has to be allocated constantly by the renewed deadlines, meaning limited partners may face a road block at a certain point if relying heavily on existing general partners.

“There was a tendency (for local institutional investors) to go only for the GPs with a good reputation and a track record,” said Park Don-ghi, division head of Energy & Infrastructure at Kiwoom Asset Management. “But Korean investors should continue multimanager investment for the time being. Investors should find an expert GP by sectors, other than top-tier GPs.”

Appetite remains solid

In addition to sticking to “comfortable” fund managers, most institutional investors are forced to reassess the valuation of stable assets due to a price gap between proposed buyers and sellers. Institutional investors here are also applying a stricter risk-return profile by focusing more on the safest “core” assets to bear the brunt of the COVID-19 impact.

Such institutional investors’ conservative turn, however, does not necessarily mean their appetite for infrastructure investment is waning.

Some investors began to turn to global assets in the sectors such as renewable energy and digital infrastructure. The nation’s “Green New Deal” initiative is in line with this. The plan to inject some 160 trillion won ($134.6 billion) by 2025 in the sector of digital and renewable is expected to accelerate the push for institutional investors here to go ahead with such assets, said investment professionalsbased in Seoul.

Park Hee-jun, president and chief executive of Seoul-based investment adviser Energy Innovation Partners, said investment in data centers, energy storage system facilities and hydrogen stations could generate additional yields for global GPs, which gives institutional investors an attractive option to meet the internal goal by end-2020.

The state-sponsored initiative is not only garnering attention from global investors but also creating new investment opportunities globally involving Korean state entities, partly by encouraging more Korean public corporations to take part in overseas projects.

“Especially Korean public corporations will accelerate their infrastructure investment in overseas countries, riding on the Korean government’s Green New Deal‘ policy,” said Jin Hyung-joo, head of Alternative Investment Division and managing director at Hana Financial Investment. “Energy-related private companies are also transforming their stance toward investment targets and products.”

Jin added that securities companies like Hana Financial Investment are capable of offering financial services to Korean domestic energy companies in search of overseas projects, based on the experience in sourcing an overseas real asset deal and underwriting the deal for local institutional investors. 

Some institutional investors here were showing appetite for such asset classes at home and abroad.

Lee of Lotte Non-Life Insurance also said he was willing to deploy more capital in infrastructure assets, such as operational renewable energy assets and fifth-generational network infrastructure in the United States and Europe. Lotte Non-Life manages $15 billion assets with 15 percent exposed to infrastructure assets. It was also focusing on availability-based public-private partnership (PPP) projects, where private investment in infrastructure projects are largely guaranteed by the government, he added. Lee Seok-won, investment manager at the Public Officials Benefit Association, also said it was willing to bet on what used to be out of sight, such as digital infrastructure, listed infrastructure and secondary loans. POBA oversees 15 trillion won assets, with 1.4 trillion won exposed to infrastructure assets.

Another institutional investor said that investing in infrastructure itself could be a relief from regulation.

To an insurance firm, investing in availability-based PPP assets where the government makes regular payments to the private investors like insurance firms could be ways to get relief from the regulation that restricts the amount of risks they can take in investment -- risk-based capital ratio -- said Jerry Yeo, head of investment team 2 at DB Life Insurance.

The question is whether such government-guaranteed assets could deliver a yield above the internal performance goal of the institutional investors, Yeo added.

Mitigating bottleneck

The virtual forum also indicated that Korean institutional investors were searching for ways to keep the cross-border deal unaffected despite limitations for due diligence on the overseas assets, in the nation where the financial watchdog is considering invalidating virtual due diligence as a proper means to ensure safety of the target asset.

Institutional investors here have come up with ways to streamline the deal flow thwarted by due diligence efforts during the pandemic. They turned to multi manager investment strategies by investing in blind pool funds managed by international fund managers, so that the managers will have the obligation to conduct due diligence overseas.

Lee of Lotte Non-Life said it was using the letter of credit to ensure an additional due diligence later on, which mitigated the bottleneck in deal proceedings.

“Through the way, we can get good opportunities in advance from GPs, which is a way to overcome the obstacles,” Lee said.

Yeo of DB Life said it was also revising internal regulations to allow video conferencing with blind pool fund managers to become a valid method of due diligence on the condition of making subsequent onsite due diligence, and enable top-tier fund managers to be exempt from due diligence.

Korea Post, having 6 percent infrastructure exposure out of its $120 billion assets, was an exception. According to Lee of Korea Post, it is free of travel constraints when conducting due diligence of assets in the US, by taking advantage of local accounting firms and the postal agency’s US unit in New York. 

By Son Ji-hyoung (consnow@heraldcorp.com)

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