Q: POBA’s required return rate at the portfolio level is disclosed as 4.5 percent this year. Is this why your organisation is focusing on private corporate debt and real estate debt?
Jang: Yes. We prefer investments that generate cash dividend yields within this investment commitment year.
Q: Then is it fair to say that POBA’s overall investment strategy will be focusing on debt?
Jang: Yes, I think so. In fact, we are looking at a minimum of five percent expected return rate. This year, we are more cautious when making decisions, as investment products seem more expensive compared to a few years ago.
Also, we are looking at niche markets and assets that are less volatile even if market dislocation occurs. For instance, we are looking to commit to a closed-end private credit fund that has exposure to credit counselling and recovery services and pools of individual rehabilitation loans in the US.
If an individual debtor goes insolvent but can provide proof of monthly income, it is possible to proceed a debt settlement given a court’s order. Then an investment manager can buy the notes [written pledges to replay loans] at a discount and pool them.
POBA has invested in such funds. In our experience, some [loans] defaulted, but most of them performed well. So, we are considering investing in this strategy again.
Q: POBA currently prefers real estate debt over equity. Why?
Jang: To diversify our investment portfolio. In fact, we have been focusing on downside risk mitigations since 2016. For instance, our real estate equity and debt portfolio breakdowns changed to 7:3 from 10:0 in a three-year timeframe.
If we invest in the equity side now, we will worry that asset prices, and therefore the return rates, may fall. I think the debt side is safer as long as we focus on loan-to-value ratios and who the [existing] lenders are.
Real estate debt can be an alternative fixed-income asset class and we can pick up additional yields from it.
Q: Which market are you focusing on mostly: the US or Europe?
Jang: I think the US real estate debt market is the largest in size. US banks, for instance, pulled back on real estate lending, so institutional investors are playing a bigger role there. In Europe, I think banks are still dominant.
Q: Other Korean investors have been very active in the US commercial real estate debt market as well. What is your view on this?
Jang: For the last two years, our Korean institutional peers invested a lot in commercial real estate debt. Korean insurance firms are also actively investing in it.
Q: Recently, Korea Investment Corporation entered into a memorandum of understanding with Korea Post, another Korean institutional investor. Is POBA also working with other Korean institutions for deal sourcing?
Jang: Not really. But POBA has an existing joint venture with a US real estate investment firm, Pacific Coast Capital Partners, and a US pension fund, California State Teachers Retirement System, to [indirectly] invest in the US commercial real estate debt market.
Of course, GPs play an important role in commingled fund investments. But in the case of a JV format, investors can inject additional capital into a real estate asset that might fall into credit events. That way, the investors can avoid a sell-off.
I believe that control and ownership matter when investing in today’s real estate debt market. For instance, we work with PCCP. We understand that they have a track record of asset restructuring and turnarounds if any issue arises from their underlying real estate assets.