Three lessons for GPs from Seoul’s investors

The second annual Private Debt Investor Seoul Forum featured a bevy of lessons for credit managers about fundraising and engaging with investors in Korea.

As Korean investors have grown in importance in the private credit world, so too has understanding their needs and preferences, along with the legal and situational landscape that comes with operating in the country. Attendees at Private Debt Investor’s second annual Seoul Forum received a crash course in dealing with the country’s LPs. Below are three takeaways from the event.

The high-net-worth-individual fundraising channel has shut…

A scandal emerged earlier this year involving an alleged fraud concerning $400 million in Australian real estate transactions, which has frozen the private fund placement market for high-net-worth investors in Korea, one LP consultant in the country said.

The scandal involves local firms JB Asset Management and KB Securities, both of which claim Australian firm LBA Capital mismanaged their capital, The Sydney Morning Herald reported. Instead, JBAM alleges LBA Capital used the money to further itself and a subsidiary it owns, Bright Living Australia. LBA had not responded to the paper’s request for comment.

HNWIs still need yield, which has been a motivating factor for many Korean investors that have entered private debt. Now the investor constituency has turned to equity-linked securities to satiate the need for yield, the consultant said.

But the needs of insurance investors and fortunes of US direct lenders have shifted

While the difficulty of raising from HNWI individuals may not be welcome news for GPs, insurance companies in Korea may now have even more capital to deploy into private debt. These LPs are subject to risk-based capital ratios and can face charges.

The cost of private equity to investors – a return rate which investors need to surpass in order to make an allocation worth it – is set under a new regulation to rocket up to 49 percent per annum, versus 12 percent under current law. That statute was set to go into effect in 2021 but has been delayed until 2022. Looking at that figure though, the question arises: what private equity manager could earn that for an attractive risk-adjusted return?

In addition, US direct lenders have seen their fortunes shift in the country. At this time last year, currency hedging costs ate into the ultimate net return for Korean LPs by about 1.5 percent. That number has since fallen to 0.8 percent this year. Korean investors have largely committed money with US and European direct lenders, and currency hedging costing less can only work in US GPs’ favour.

Winning one Korean commitment can make the next one easier

Many of the largest Korean LPs have made their initial allocations to the asset class, and even substantially filled out their credit portfolios. But it is still new to a good number of Korean investors, one panellist noted.

One placement agent noted that winning a commitment from some of the largest LPs can be validation to some of the newer investors on both the asset class at large and the given manager in question. A way to make that first commitment more likely is to understand the legal landscape, such as the specific products in which insurance firms can and cannot invest, an insurance investor noted.

In addition, another Korean investor noted that the language barrier can prove to be difficult when dealing with very nuanced and specific things like legal documents. Bringing along a translator or having someone fluent in Korean can make things easier. The panellist noted that an A-class manager can make a B-class project A-class, but it also went the other way: a B-class manager can make an A-class project B-class.