National Pension Service of Korea plans to form separate teams for debt and secondaries amid rising appetite for the former.
The 916 trillion-won ($661.4 billion; €661.3 billion) institution had wanted the two units to operate independently in 2020 but scrapped these plans last year due to “market conditions,” Jeryang Lee, head of the strategic alternative investments team at NPS, told delegates at the Private Debt Investor: Seoul Forum on Tuesday. The two were instead integrated into the newly formed alternative investment strategy department, which also covers GP stakes investing.
NPS will revive its plans to separate the two strategies next year, Lee said.
“That may be subject to further discussions, but at the moment that is the plan,” he added. “The reason why we wanted [private debt] to be an independent team on its own is so that we can grow the portfolio of PD assets. And given the economic situation… it’s making PD investments overall more attractive.”
Alternatives accounted for 6.3 percent of the overall NPS portfolio as of 30 June, per its website. The institution held 56 trillion won of private equity, debt and hedge fund assets, of which 73.5 percent was invested overseas. It has committed to the likes of GSO European Senior Debt Fund II, AMP Capital Infrastructure Debt Fund V and Blackstone Real Estate Debt Strategies IV, according to PDI data.
NPS will allocate 20 trillion won to private capital strategies this year, of which 10 percent will go towards direct lending, Lee said, pointing to direct lending yields north of 10 percent and improving returns for senior debt and mezzanine as justification for its growing appetite.
“Up to the late 2010s mezzanine rates were very low, lessening the relative appeal,” he said. “Given the lack of capital, the managers are actually seeing a lot of inbound calls – a lot of good opportunities. So we think that likely there will be good opportunities in the mezzanine space as well, and opportunistic credit or distressed.”
NPS’ activity in distressed debt has been limited by its internal peer group benchmarking system used to select potential GPs. The benchmark considers returns but does not factor in risk, which presents the organisation with a “dilemma,” Lee said.
“The peer group benchmark is not the best to apply for credit, so internally for higher risk strategies like distressed there are some constraints limiting our investment somewhat,” he added.
“Basically because of those constraints or restrictions out of private debt, we do look at direct lending more as an important strategy… But then we may be able to rethink the benchmark a bit [and] in that case we would be able to achieve a greater balance across direct lending and then other opportunistic strategies as well.”