Korean investors still wary of risky private debt

Although private debt has become an investment option, South Korean investors are reluctant to adopt strategies that capitalize on poor debt valuation, saying they prefer a conservative portfolio that protects investors from losses.

Instead, they seek to increase investment security by focusing on diversification and recession-proof sectors.

“We will continue to invest in defensive sectors and build a well diversified portfolio, as we prefer an all weather strategy in the market with high uncertainties”, Park Wan-sun, head of the alternative investment team at the foreigner at Fubon Hyundai Life Insurance, told PDI Japan Korea Week 2021 Virtual Experience, an investor forum hosted on Nov. 10 by London-based market intelligence firm PEI.

Private debt is now gaining attention as a rapidly emerging alternative investment, based on predictions that demand for non-bank loans will increase among companies or projects involving real assets. According to Prince Edward Island, private debt fundraising in the first three quarters of 2021 jumped 18.2% to $ 139.5 billion globally.

Private debt varies in terms of risk level, from relatively safe senior debt to direct loans, mezzanine, special situations and the riskiest distressed debt.

In the latter two, the strategies are largely designed to take advantage of what investors think is a price shift – in other words, they think certain debt assets are valued incorrectly.

Investing in special situations targets borrowers who have strong fundamentals but who are affected by external uncertainties, while investing in distressed debt focuses on debt issued or borrowed by entities in financial difficulty.

Fubon Hyundai Life Insurance, the Korean insurance arm of the Taipei-based Fubon Group, committed $ 400 million this year to blind pool funds dedicated to private debt, 70% of which targeting direct and other non-bank loans . According to Park, his commitment to private debt will rise to $ 500 million next year.

Meanwhile, Hyundai Marine & Fire Insurance, which has allocated $ 880 million in private debt, is now seeking new offers of non-bank direct lending and mezzanine investing through fund managers. In addition, the institutional investor has started to invest directly in the financing of acquisitions.

According to its representative, these private debt strategies aim to provide protection, as risky bets are considered premature by Korean allocators at the nascent stage of private debt investment.

“We have strategically focused on direct lending and mezzanine debt, and we may also consider investing in special situation loans and distressed debt in the future,” said Oh Inn-chul, senior manager from Hyundai Marine & Fire Insurance.

“But we will take a wait-and-see approach. And that’s where the challenges would come from.

According to Oh, some private debt fund managers with an appetite for risk tout their performance as resilient and consistent, but it is often questioned whether their performance is driven by the actions of the fund managers or by the current high levels of liquidity in the market. Marlet.

“This is why we are taking a closer look at how our existing external managers are responding to change (in the post-COVID era),” Oh said.

Korean fund houses echoed the Korean dispatchers’ point of view in terms of seeking security.

One of them, VI Asset Management, viewed direct non-bank lending as its primary private debt strategy, deploying more than half of its total investment in private debt.

“We are capitalizing on direct lending strategies because they target senior loans secured with collateral. It offers downside protection with a loan clause, so institutional investors can seek protection and provide a decent return on their investment, ”said Lee Ha-kyoung, chief investment officer of VI Asset Management.

Meanwhile, distressed debt investments are fading in Korea.

“Distressed debts were in the spotlight immediately after the COVID-19 pandemic outbreak. But the market resolved this problem quickly and normalized, compensating for the poor placement of bond prices. Since then, troubled private debt investments are no longer common, ”said Eugene So, head of the global alternative investments team at IBK Securities.

The two Korean insurers have been reluctant to enter new emerging private debt markets.

Geographically, North America and Europe are major regions for private debt investment. According to the Prince Edward Island estimate, the concentration of capital targeted by the funds, excluding multi-regional funds, was estimated at $ 239.7 billion in September, accounting for 73 percent of the total capital.

The Asia-Pacific region is a rapidly growing market, but the capital targeting the region is still only $ 16.4 billion.

While Park of Fubon Hyundai expressed its intention to expand into the North American market by focusing on the European market, it said it was premature to expose itself to private debt deals in Asia, where the The concept of investing in private debt is relatively new and commercial lenders dominate the loan market.

“We don’t have a plan yet to invest in Asia-focused private debt funds,” Park said.

The process of risk management and scrutiny of conservatively-inclined Korean institutional investors often leaves them little chance to find their way.

And even asset-backed loans can be difficult to value because the scope of what can be used as collateral is very wide.

“There are a myriad of underlying asset classes for asset lending strategies and the way the investment is structured. So it’s not easy to come up with all the different strategies to assess risk, ”said Oh of Hyundai Marine & Fire.

As for what matters in which managers choose to manage exposure to private debt, they discussed the ability of a private debt fund manager to use dry powder as quickly as possible.

“We attach great importance to external partners who are able to quickly exhaust uncalled capital commitments and constantly continue to invest,” Oh said. “We monitor the investing activities of fund managers by reviewing the cash flows of their funds. “

This indicates how long the fund manager takes to use the free capital. Unused capital commitments translate into higher costs for Korean insurance companies, which are subject to more stringent capital adequacy regulations.

“Korean insurance companies impose capital charges not only on amounts withdrawn, but also on unfunded capital commitments. It is therefore more desirable that the capital commitment of Korean insurers is deployed by fund managers to generate profits, ”Park of Fubon Hyundai said.

Prince Edward Island is a media partner of the Korea Herald.

By Son Ji-hyoung ([email protected])

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