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This $9.1 Billion Korean Fund Is Eyeing Europe Student Housing

Updated on
  • $9 billion South Korean pension fund also looking at Australia
  • ‘It’s the thirsty man who digs the well,’ POBA’s CIO says

Student housing in Europe and Australian infrastructure are luring global funds out of their comfort zone, as a South Korean manager of local government employee savings joins peers around the world getting creative overseas in search of better returns.

Institutional investors from Seoul to New York are increasingly on the prowl for alternative assets, as low interest rates at home make it harder to meet promised payouts. In the latest example, South Korea’s Public Officials Benefit Association is considering putting money into a fund that invests in student housing in Europe along with other globally prominent pension managers, according to Chief Investment Officer Jang Dong-hun.

The fund targets annual returns of 5 percent, more than double South Korea’s 10-year sovereign bond yield of about 2.4 percent. That underscores the pressure the country’s investors face to wade into new areas, as a wealth fund and another pension fund have also stepped abroad more this year. Elsewhere in Asia, Singapore’s sovereign wealth fund GIC Pte has invested in a $1.6 billion student housing deal with partners.

“While it’s inevitable that investors need to expand investments into a variety of alternatives for better returns, there may be asymmetric information and various types of risks in global alternative investments," said Song Hong-sun, a senior research fellow at Korea Capital Market Institute.

Other investors in South Korea have also turned overseas. Korea Investment Corp., a wealth fund, opened a Singapore office this month to expand alternative investments, while the National Pension Service said in May it plans to boost overseas investment to 40 percent of its assets by 2022 from 27 percent last year.

“We turned to overseas assets as there aren’t many investments at home that can stably fulfill our return needs,” said Jang at Public Officials Benefit Association, or POBA, which manages about 10.4 trillion won ($9.1 billion) for about 260,000 local public officials. “There’s a saying, it’s the thirsty man who digs the well.”

The fund is also mulling co-investment in Australian electric utility assets, and is planning to invest the equivalent of about $218 million in private debt in North America and Europe.

It has picked Oaktree Capital Management and Park Square Capital Partners as preferred managers for private debt investment management, Jang said. POBA is boosting other overseas credit investment including U.S. collateralized loan obligations and insurance-linked securities.

The pension manager is looking at student housing in Germany near universities, according to Jang. Residential real estate assets are less sensitive to economic conditions than office towers or retail assets, he said.

Singapore’s GIC has said there is strong demand for such assets, especially those that are well-located. They provide stable cash flows to investors, it said.

Better Returns

Alternative assets accounted for about 49 percent of POBA’s total assets. Such investments were the best-performing asset class last year for South Korea’s biggest investor National Pension Service. NPS returned 12.34 percent on overseas alternative investments in 2016, compared with 1.83 percent on its domestic bond holdings.

POBA is focusing more on senior or mezzanine debt rather than equity investments across asset classes such as infrastructure and real estate assets, as it’s hard to expect capital appreciation in mature markets, Jang said. The fund has invested in overseas infrastructure debt.

“Because we manage retirement funds, we’ll need to look for assets with fewer downside risks,” Jang said. “We’ll keep looking into investment opportunities in various asset classes that can offer stable cash flows while studying how global pension funds are coping in the low-rate environment.”

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