Seven of the world’s 22 major pension markets are in the Asia-Pacific region with South Korea the fastest growing, according to a study by Willis Towers Watson.
The advisory firm’s Global Pension Assets Study 2020 found South Korea had seen a growth rate of 12.4 percent, compounded annually, since 2009.
Many of these pensions have been engaging much more with private debt in recent years. But covid-19 has changed the game, with private debt fund managers and investors swapping meetings for conference calls and cancelling due diligence trips due to travel bans and social distancing guidelines.
In this new environment, Private Debt Investor asked private debt investors in the Asia-Pacific region about their top investment challenges amid the coronavirus pandemic.
Click here to see more of PDI’s covid-19 coverage.
The first interview in our series is with Dong-Hun Jang, chief investment officer of the Public Officials Benefits Association, based in Seoul.
Last year, POBA announced two requests for proposals for private debt investments, one in February the other in November. How have you been carrying out this year’s offshore alternative allocation plans considering the disruption?
Jang: We did not stop issuing RFPs. And yet it is early in the year. Still, the majority of our new investment plans are going through the RFP process along with the next rounds of quantitative and qualitative assessments of GPs, such as on-site presentations and Q&A sessions.
We are worried about how to keep [the process] going in case the situation continues throughout the second half of the year.
We are under pressure with our focus on investing in alternatives [amid the coronavirus impact] because if we do not allocate capital now, this can hurt the future performance of the investment portfolios. This is the biggest concern that we have now.
Which sub-strategies in private debt are you mostly focusing on?
Jang: Mainly we have been looking at real asset-backed debt, including residential real estate assets in the US, logistics, and infrastructure-related assets.
What’s the situation with the offshore alternative investments through co-investment partnerships and the Memorandums of Understanding?
Jang: Things are slower than we expected with the JV and other partnerships due to the outbreak situation. It is impossible to proceed with investments if local GPs and their operational service providers cannot do business as usual, even if we want to carry on with local deals there.
As per the official statements from late last year, POBA plans to allocate as much as 59 percent of its AUM to global alternatives. How is the situation in the domestic alternatives market?
Jang: It is difficult for us to meet the target return rates by investing in domestic alternatives such as real estate assets due to the low interest rates in Korea. On the domestic alternatives side, things are not as bad as offshore markets where we stopped all planned due diligence trips due to the coronavirus disruption.
Have any of the GPs that you work with communicated with you and your team about their solutions to the current situation?
Jang: Many of them are working from home and focusing on emails and phone calls. They seem to be managing situations with portfolio companies, if any, and focusing on risk management. My understanding is that the GPs’ activities on new deal sourcing are very limited now.
We now see higher volatility and fluctuation in short-term liquidity in the public markets. Looking across the current investment environment, what is your view on investing in private debt strategies?
Jang: Our track record shows that risk management during 2008 was successful. I think our exposure to liquidity and volatility risks are very limited as our private debt allocation has been mainly on unlevered senior secured investments.
It has been a borrowers’ market. We have seen cov-lite deals and greater liquidity has flown into private debt strategies. However, this market situation can offer a good chance for mid-market lending businesses [to deploy the dry powder that has piled up for years], not only in the North American region but also across Europe.
I see a correction in the private debt market as well, in the sense that things are now shifting from a borrowers’ market towards normalisation with an adequate risk-return spectrum. And GPs should be able to get back on track and actively look to deploy capital, using the dry powder in private debt.
Anything else to add?
Jang: Typically, we have a lower investment flow during January and February. There are very few investment committee meetings that are in their final rounds scheduled for early April, for instance.
If the coronavirus outbreak goes on till the year-end, we might not be able to schedule any investment committee meetings for a while. It is concerning as we work with foreign GPs on various aspects.
We might do more re-ups with the GPs that we have worked with. It is still a concern for me that capital deployment might get slower. This is the biggest concern for us because we are holding a lot of cash now.