GPs get a handle on the world’s third-largest pension’s revolving door

Korea’s National Pension Service, the world’s third largest pension fund, has been hit by a wave of senior executive departures over the last two years, raising questions about repercussions on its investment programme.

The pension fund has been without a chief investment officer for more than a year. This July, Lee Su-cheol, formerly the head of investment strategy, took over as acting CIO. His predecessor in the acting role, Cho In-sik, recently resigned after less than a year in the position. Cho assumed the role after the former CIO Kang Myeon-wook resigned in July 2017 for personal reasons after serving for less than two years.

Other senior executives that have left NPS over the last year include Yoo Sang-hyun, the global head of alternatives; Lee Kyung-jik, head of global public markets; and Yang Young-sig, the head of investment strategy. Choi Hyung-don, who previously oversaw the pension’s offshore private equity team, is now global head of alternatives. Former head of the offshore equities investment team Im Hyung-ju is the new head of global public markets. There has been no replacement for head of investment strategy.

NPS declined to comment on the reasons behind the departures. There has, however, been an increase in employee attrition at the pension since 2015, when it started the process of moving its headquarters to Jeonju – a city known for traditional houses and craft shops more than global investments. The discussions for relocation had started in 2003 as part of the government’s initiative to decentralise economic activities from Seoul.

NPS’s investment management unit lost 30 employees in 2016, followed by an additional 27 investment professionals in 2017, NPS’s press team confirmed to Private Debt Investor. As of the end of July, 16 more employees had resigned, according to NPS records. In comparison, only 25 employees left the organisation between 2012 and 2014, according to local press reports.

“Some say that our relocation to Jeonju is one of the reasons why many investment officers left their jobs, but the turnover rate is actually lower than [the] industry average,” NPS’s press team wrote in an email response to PDI, referring to an 11.6 percent turnover rate among its investment officers as of the end of 2017.

The pension is currently in the process of hiring a new CIO, which will be finalised “as soon as possible”. NPS also said that it is looking to hire 34 new investment officers by November.

Business as usual?

PDI spoke to several consultants and managers that have worked with NPS to analyse how these senior management departures have affected business dealings.

NPS counts Blackstone, BC Partners, Lindeman Asia Investment Corporation, STIC Partners and VIG Partners, among its GPs, according to PDI data. Even amid its leadership predicament, the pension giant has continued to make alternative investments. Global investment managers BlackRock and Partners Group, for instance, were awarded offshore real estate and infrastructure mandates respectively in the fourth quarter of 2017, according to a public disclosure from NPS as of the end of April.

“There is no impact of the absence of the CIO on the alternative investment activities of NPS,” a spokesman for the pension said. “Now that the acting CIO is at the office, the investment process is going.”

Challenges arise, NPS’s partners said, when deals need to be approved by the investment committee. PDI understands that the heads of eight departments at NPS are members of the investment committee. This includes heads of domestic alternative investment, global alternative investment, global public market and investment strategy, among others.

“We have worked with NPS on a deal-by-deal basis [before] and it typically takes two to three months for NPS to review one deal and get its investment committee’s approval, which is not efficient as compared to a commingled fund structure,” said Joseph Lee, Seoul-based senior managing director of IGIS Asset Management – a real estate investor that counts NPS among its blind-pool investors.

As such, as a Hong Kong-based placement agent pointed out, new GPs seeking commitments from NPS could also face difficulties in getting allocations locked down.

Other managers pointed towards the challenge of determining key contacts at the firm amid continuous reshuffling.

“We are more affected by portfolio managers – the guys we have a working relationship with – who are leaving NPS to go into the private sector,” a Seoul-based GP who has worked with NPS said. “Most of them leave because they prefer to be in Seoul with their families [rather] than in Jeonju.”

Indeed, some of the long-serving heads left NPS to take up employment at securities firms, insurers and asset management firms. In February, Yoo, the pension’s former global head of alternatives, joined the Seoul-based investment firm Mirae Asset Daewoo as head of private equity. Lee Eun-pyo, formerly head of investment strategy at NPS, now serves as the vice chairman and chief executive officer at Truston Asset Management – a Seoul-headquartered asset management firm.

According to another Seoul-based GP who counts NPS as an LP in its latest private equity fund, the confusion of who to report to is a concern.

“If there are so many changes in personnel, who do we go to?” the manager said.

One Hong Kong-based fund of funds manager that has previously raised capital from NPS went on to claim that his firm has stopped going to the pension because “they have become difficult to deal with”.

“Like it or not, we don’t see the [turnover] situation changing,” he said.

Problems with staff continuity are not unique to NPS, nor are they entirely accidental. Senior executives at Korean pensions serve only limited terms.

As Elizabeth Oh, Hong Kong-based head of investments advisory for Korea at consulting firm Mercer, pointed out, Korean pension funds in general have relatively short terms for C-suite executives, ranging from two to three years. The CIO post at NPS, for example, has a two-year term limit with an option to extend another year.

“Korean pensions need to do away with the limited term contract,” says Conrad Yan, board member of the Pacific Pension & Investment Institute – a global organisation for pension funds, sovereign wealth funds, endowments and foundations. “No pension can do a proper job if the CIO job has a short term and no continuity. New leadership every two to three years is just disruptive for investment planning and execution.”

“Korean pensions need to get to the bottom of this,” he added. “If you look at the Canadian pension model, the most important success factor is not about being direct investors, but the fact that they had corporatised very early on – this insulates pension funds from the increasingly political world.”

Despite talent retention issues, NPS continues to pursue an aggressive investment approach. As of the end of 2017, the pension fund had invested 10.8 percent of its portfolio, or 66.8 trillion won ($60 billion; €51 billion), in alternatives. It plans to beef up its allocation to global alternative investments to 12.7 percent, or 92.6 trillion won, by the end of 2019, according to a public disclosure from the Ministry of Health and Welfare on 30 May. By 2023, that allocation is expected to be increased to about 15 percent.

To put it simply, it may be hard for managers to ignore the sheer size and scale of NPS’s portfolio, even if it means dealing with management changes.

“At the end of the day, GPs continue to chase capital and will continue to look for that relationship with LPs,” said Niklas Amundsson, managing director of placement firm Monument Group. “As frustrating as it is, NPS is clearly an LP who writes big cheques – a minimum $100 million to $200 million – so GPs have to put up with [high turnover].”