Korea’s National Pension Service’s (NPS) venture capital portfolio is set to break through the KRW1 trillion (US$840 million) million mark for the first time by end-2021 and up 10% over 2020.

Korean unicorns are increasingly common and NPS is looking to expose itself to venture capital private equity. VC investments so far this year have totalled KRW500 billion (US$420 million), according to the Korea Times.

Overseeing the shift towards VC is Ahn Hyo-joon, who was reappointed CIO for a further year until October 2022, having been appointed to the position on a two-year contract in October 2018. Ahn is already NPS’s longest serving CIO. The move will ensure a modicum of stability and consistency as the fund drives forward its long-term strategy, although longer terms would provide greater incentive to encourage any CIO to lengthen their investment horizons. As CIO, Ahn has stepped up efforts to form partnerships with global GPs and pension funds while pressing ahead with raising the fund’s exposure to alternatives.

Despite the fast-paced deployment of capital, VC is still only roughly 0.1% of the fund’s total AUM of KRW908 trillion (US$778 billion), reflecting its conservative approach to risk.

NPS’s alternatives allocations are also shrinking as a portion of the portfolio, totalling 10.5% of AUM at end-July – down from 13% in 2020. The surge in public equity values is putting the alternatives target of 13.2% by end-2021 and 15.0% by end-2025 increasing out-of-reach. The fund would have to shift more than KRW22 trillion (US$20 billion) from fixed income and public equity into alternatives to meet its short-term targets, a target it is set to miss.

The return on global equity at end-July was 21.1% while domestic equity was 12.8%, eclipsing the returns of 6.8% in alternatives, 5.1% in global fixed income and 0.1% in domestic fixed income.

NPS’s strategy allocates capital to private equity funds, which represent 72% of its private equity allocation; the rest is comprised of growth capital (11%), mezzanine and acquisition financing (8%), venture capital (7%) and NPL (3%). Private equity funds chosen by NPS include those run by SkyLake Investment, IMM Investment, LB Investment, and Atinum Investment, which have all multiplied its investment.

This year has seen NPS acquire a major stake in the UK private equity fund BC Partners and allocated US$887 million to co-investments with the fund. The move will help boost NPS’s global deal-sourcing capabilities. In the real estate space, it has recently formed joint investment partnerships with Hines and Stockbridge across a wide range of sectors. Life science offices and logistics properties are also part of its growing real estate exposure via funds managed by Blackstone and GLP. Such relationships can enable a fund to develop insight and skills.

Rather than build up its own internal capacities for VC investment, NPS has focused on seeking out managers who can demonstrate a high yield. The NPS has deployed more than KRW60 trillion (US$51 billion) worth of overseas alternative investments to 160 asset managers, although there is a distinct bias towards real assets over private equity. It is likely those relationships will not diminish any time soon.

According to Korean Times, the fund is planning to select four more venture capital investment firms by November, allocating a total of KRW150 billion (US$128 million), but is also beefing up its VC expertise in its internal advisory investment group.

The learning journey for the Korean pension fund could be longer than anticipated and this casts questions over the desirability of pumping billions into private equity just to chase a target, especially in a fevered market. NPS will not meet its alternatives targets through its current capacities but instead will continue to rely on co-investment partners and external managers.

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