South Korea’s Military Fund May Sell Biggest Overseas Holding

South Korea’s Military Mutual Aid Association, the defense ministry’s $7.6 billion fund, may sell its biggest overseas holding after five years to seek out ports and other infrastructure assets.

The military welfare-fund, which bought 6.9 percent of Thames Water Utilities Ltd. for 300 billion won ($281 million) through a fund managed by Macquarie Group Ltd. in December 2006, plans to tap investor interest by the end of this year, Chief Investment Officer Jin Yeong Ho, said in an interview yesterday.

“I hope to make an exit as we expect to post a gain from the investment,” Jin, 53, said at his Seoul office. “We may use the money to re-invest in a similar kind of funds focusing on social overhead capital such as ports.”

Military Mutual is among a growing a number of funds scouting for infrastructure assets. Alberta Investment Management Corp., a Canadian pension-fund manager, expects to make six deals in areas such as real estate and infrastructure this year to increase returns, Chief Executive Officer Leo de Bever said this month. China Investment Corp., the country’s $300 billion sovereign wealth fund, is targeting mining, real estate and infrastructure investments in the Americas, Felix Chee, the fund’s representative in Canada, said in June.

Jin declined to say how much the stake in the privately held company is worth today or the gain it expects from the divestment. The MSCI Europe Utility index has fallen 29 percent since the start of December 2006, when Military Mutual first made the investment.

Military Spending

The Korean military fund was set up in 1984 to look after the welfare of military personnel and currently has 164,751 subscribers. South Korea’s defense spending to gross domestic product was about 2.8 percent in 2009, compared with 0.9 percent in Japan and 1.6 percent in China, according to a Defense White Paper. South Korea, which remains technically at war with North Korea since their 1950-53 conflict ended in a cease-fire, has about 650,000 troops.

Thames Water Utilities, formerly Thames Water Plc, is the U.K.’s largest water and sewerage company, serving 14 million customers across London and the Thames Valley, according to the company website. In 2006, Thames Water was sold by RWE AG to Kemble Water Ltd., a group led by Macquarie Bank, for 4.8 billion pounds.

“We’re interested in social infrastructure because those assets generate consistent returns in the medium- and long-term,” Jin said. “We’ve come to pay more attention on stability of assets since the collapse of Lehman Brothers Holdings Inc.”

Boosting Overseas Investments

The Military Mutual plans to increase its overseas investments to 15 percent of assets in three years, from 9 percent now to boost returns, Jin said. The fund plans to invest in bonds from emerging economies such as India, as well as overseas exchange-traded funds and “promising” companies in China and other Asian nations, he said.

In the second half, the Korean military fund is considering investing in oil fields in the U.S. and Vietnam, held by state-owned Korea National Oil Corp., Jin said. It also may invest in mineral projects owned by Korea Resources Corp., he said.

The fund spent 30 billion won in December in private equity funds that invested in gas and oil fields projects in Europe, Jin said.

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