Four Korean LPs shifting focus to European private credit

Mid-market GPs are benefitting from demand from Korean investors as the capital flows into direct lending, for now at least.

A state-backed pension fund in Korea, Government Employees Pension Service (GEPS), has made an €80 million ($90 million) commitment across two commingled private debt funds managed by Alcentra and BlueBay Asset Management, a source from the pension fund confirmed to PDI  last week while declining to comment further.

The pension fund previously announced the award of the mandates on 19 October. According to PDI data, Alcentra European Direct Lending Fund III is targeting €2 billion. Among other institutional investors in Fund III, Chicago Policemen’s Annuity & Benefits Fund has disclosed a $10 million commitment.

BlueBay Direct Lending Fund III, the other direct lending fund manager that GEPS has made a commitment to, is targeting €2.5 billion, as per PDI data. The investor base includes several US institutions such as the New Hampshire Retirement System, which has disclosed a $50 million commitment to the fund.

GEPS’ recent commitments give clues as the type and size of credit funds they are willing to back.

Three other Korean institutions with assets under management (AUM) sized from $15 billion to $25 billion, have confirmed with PDI that they are seeking private credit fund investment opportunities across senior secured debt, mezzanine, and direct lending strategies.

PDI has learned that another Korean institutional investor, Police Mutual Aid Association, had invested $30 million apiece in two private debt funds in the last 12 months as of 21 November.

Mid-market direct lending funds have garnered more traction from Korean institutional investors over the last 24 months. For instance, Park Square Capital, a London-headquartered private credit manager, has won mandates from Korea Post, Public Officials Benefit Association, PMAA and Construction Workers Mutual Aid Association, among others.

Two investor sources said a reason why direct lending funds are gaining more traction is because many Korean LPs view the asset class as an alternative to traditional fixed income assets, with a higher risk-adjusted return rate. 

Deloitte shows in its latest report, Deloitte Alternative Lender Deal Tracker Autumn 2018,  that direct lending in Europe targets a gross internal rate of return ranging from five to 10 percent, per annum. The report adds that these commingled funds are typically from five to seven years’ long with investment periods of one to three years.

Some larger European alternative lenders say they can see the recent shift from Korean investors. But William Nicoll, a London-based co-head of alternative credit at M&G investments, told PDI that the European private debt markets got too crowded.

“All the money going to private debt isn’t going across all the private credit [markets]. It is all going to corporate direct lending,” he said, adding that, “for smaller institutions, it (direct lending fund) is still fashionable. But I think some of the larger institutions have started to show concern about valuations and the credit strength of the underlying deals.”