South Korean institutional investors increased private lending as interest rates stay higher for longer, while tapping into the secondary market for faster exit. They strengthened acquisition financing for downside protection and chose stable income generation rather than risk-taking investments. Alternative investment heads from four institutions – National Federation of Fisheries Cooperatives (NFCC), called Suhyup in Korean, Hyundai Marine & Fire Insurance Co., Lina Life Insurance Co. and Construction Guarantee Cooperatives (CG) – shared their economic outlook and real asset strategies for next year, at a panelist session at ASK 2023 on Wednesday. The discussion was moderated by Andrew Shin, head of Willis Towers Watson Korea. NFFC prioritized acquisition financing with high yield this year. It focused on overseas deals as some global assets, backed by the world’s leading investment banks, post returns 200-300 basis points higher than domestic assets, Chief Investment Officer Koh An-cho said. It also expanded secondary investments this year to boost liquidity at a faster pace, while cutting capital injection in real estate hit hard by rate hikes, Koh added. The fisheries’ cooperatives manages 14 trillion won in assets. Alternative investments reach 4.2 trillion won, in which real estate and infrastructure assets respectively amount to 1.4 trillion won and 700 billion won. NFCC will maintain the current proportion of alternative investments regardless of market conditions, while adjusting exposure to each of three segments — private equity, venture capital and private debt; acquisition finance; and real assets, the CIO said. “There are peaks and troughs in an economic cycle, which is typically a decade. In the era of low interest rate, many investors underestimated the cycle and poured capital in commercial real estate, which suffers today. Investors should be more prudent in selecting certain assets which are defensive to macroeconomic factors,” he explained. The cooperatives will maintain the alternative investment proportion, with increased exposure to social infrastructure and data centers next year, the CIO noted. For its global real estate investments next year, NFCC will choose blind-pooled funds that guarantee dividend distribution and stable cash flow, he said. This year has been very challenging for global investors amid geopolitical conflicts and longer-than-expected high rates, Hyundai Marine’s Executive Director Jeon Kyung-cheol said. The insurance company focused on senior secured loan investments this year as the safest tranche’s interest rate increased to a similar level of mezzanine, Jeon said. Hyundai Marine’s AUM is 40 trillion won as of end-2022. Real assets amount to 12 trillion won, including each 3.6 trillion won for real estate and infrastructure. Jeon said alternative investment strategies in the era of high interest rate should be different from the past. “We shouldn’t blindly believe that certain sectors bring high returns in long term. Many investors didn’t expect the US office market crash. We must take a more selective approach to assets with thorough research and due diligence,” he added. While many Korean limited partners often teamed up to invest in a certain tranche dedicated to Koreans, the trend won’t last long, he said. “Korean investors increasingly believe that they are better protected when investing with global institutions in a tranche. Koreans have found that some terms and conditions are too unfavorable to them, especially when setting up a refinancing plan with global investors who hold senior secured loans,” Jeon explained. He forecast that investors will find more opportunities in global infrastructure assets with medium-to-high risks and returns next year. The insurer will seek senior secured loans in domestic prime offices, as well as global blind-pooled funds for secondaries and leveraged loans with high interest rate, he noted. Lina Life Insurance boosted its direct lending this year, with a particular focus on “seed assets” that borrowers can generate stable income from, CIO Sean Jeong said. Private debt has become attractive in the era of high interest rates — some three-year yield of private loans has increased to the early 10% range, he added. Lina Life is managing 5 trillion won in assets, including 1.25 trillion won in alternative investments. Real estate and infrastructure account for 30% of the alternative assets. The insurer believes real assets mitigate the volatility of its investment returns, Jeong said. “The return on real assets offset losses on private equity and debt in the second half of 2022, driving profits on our whole alternative investment portfolio,” he explained. “We also invested closed-end funds for income-driven real assets and in open-end funds for liquidity. This strategy also helped our well-balanced portfolio,” he noted. The insurer seeks portfolio diversification and concentration on promising sectors at the same time. It sees growth potential in the multifamily in industrial sectors, while keeping an eye on value-added and secondary strategies for high returns, Jeong said. Alternative assets offered higher risk-adjusted returns than traditional assets in the past, but investors should think if this is still valid in the era of high interest rates, said Construction Guarantee Cooperatives CIO Lim Seop. Real assets will become more important when interest rate stabilizes, he added. The cooperatives for construction workers manages 4 trillion won in assets, including 600 billion won for alternative investments. Real estate and infrastructure respectively account for 60% and 20% of alternative assets. It took a conservative approach to overall real estate this year and picked relatively safe assets like properties in the Seoul Metropolitan Area, Lim said. The cooperatives also expanded acquisition financing for downside protection, he added. It will strengthen diversification by region and industries, rather than adjusting exposure to certain themes, the CIO noted. The cooperatives sees renewables and digital infrastructure as promising, but it will first conduct thorough research on the sectors’ supply and demand, he said. The oversupply of logistics centers in some markets gives a lesson that demand is critical for investment success, he added. Jihyun Kim at

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