Korean pension sets aside $160m for private debt – exclusive

The pension fund prefers lending to performing assets in the US and Europe across different strategies.

South Korea’s Government Employees Pension Service (GEPS) is planning to allocate around $160 million to private debt funds, according a request for proposal (RFP) issued by the pension fund.

GEPS will allocate around $50 million to $80 million each to two to three managers across credit-related opportunistic funds in the US and Europe. The pension fund prefers lending to performing assets, market sources told PDI.

The pension fund is looking to construct a private debt portfolio with a target return of upper single digits. An open selection process for the private debt fund managers is expected to take place within the next two weeks, according to the sources.

GEPS declined to comment.

“Private debt stands as a better alternative for risk-adjusted return than traditional private equity or fixed income investment because of the regulatory changes in Europe and the US. The mismatch in supply and demand provides good opportunities for institutional investors to fill in the gap that has not existed in the past,” said one of PDI’s sources.

GEPS is one of the pioneers among Korean investors for tapping the private debt market. Last year, it committed a total of $100 million to US-based HPS Investment Partners and Crescent Capital Group for overseas mezzanine investments after it invested €60 million in two private debt fund houses in Europe in 2015.

“You have to do careful due-diligence, select very qualified names,” an anonymous Korean investor said. “There are more than enough mezzanine players who do not take a lot of risk but are still able to generate an acceptable rate of return as long as they manage their portfolio prudently.”

Private debt investments such as senior secured loans, collateralised loan obligations and mezzanine debt in the US and European markets have attracted growing interest from Korean institutional investors seeking mid-level risk and return investments in a low interest rate environment.

The Public Official Benefit Association (POBA), another Korean pension, previously announced plans to increase its allocation to private debt by $300 million-$400 million this year.