The President of Korea’s US$169.3 billion sovereign wealth fund, the Korea Investment Corporation (KIC), reiterated the fund’s target allocation to alternative investments at 25% of AUM by 2025 in an interview with Bloomberg, indicating it is set to release billions of dollars of capital into global private markets.
The sovereign wealth fund had previously aimed to raise its alternatives target to 25% by 2027, but the schedule was brought forward by two years. By end-2022, KIC allocated 38.3% of AUM to equities, 31.5% to bonds and 22.9% to alternatives. The fund increased exposure to alternative investment from 17.5% in 2021, a task made easier by the decline in value of equities in the portfolio, due to tumbling markets.
KIC posted the largest annual loss last year since its inception in 2005, with nearly US$30 billion wiped off its value and an annual return of -14.4%. The blame lay with poor performance of equities and bonds with losses of 19.3% and 16.7% respectively, mirroring state-owned investors across the industry. Between 2018 and 2022, the annualized returns of equities and bonds were 5.7% and negative 1.5%, respectively. Cumulative profit fell 34% to US$58.2 billion.
However, KIC’s alternative investments outperformed traditional asset classes, with private equity posting an annualized average 14.7% over the 2017-2022 period and real assets at a 7.6% return, while hedge funds achieved a 4.8% return. KIC's annualised return since inception in 2005 until end-2022 was 4.12%.
In the private equity sector, KIC is aiming at tech, healthcare and venture capital opportunities, but with a more cautious, conservative approach in the face of market volatility and inflation. Its private debt strategy focuses on direct lending, as well as corporate mezzanine and distressed debt.
In real estate, the sovereign wealth fund of one of the world’s most tech-advanced economies is seeking out prospects in data centers and logistics, as well as multifamily housing and life science offices. The digital economy is also a major factor in its infrastructure investments, in addition to energy transition, clinics and hospitals, and transportation – areas that have proven to be a good hedge against inflation. KIC began startup investments in 2017, most of which were entrusted to outside asset managers, but it is now becoming increasingly hands-on.
As well as diversification of asset classes, the state-owned investor is looking to expand its geographical exposure. KIC indicated in March that it was set to ramp up operations in India in order to leverage higher returns in private markets, particularly the country’s fast-growing infrastructure sector. A US$270 billion plus pipeline of projects reflects the government’s aim to modernise Indian highways and upgrade the quality of roads as part of the country’s National Infrastructure Pipeline (NIP). The NIP aims to support growth of India’s infrastructure sector with total investment of US$1.4 trillion and is bolstered by liberalization of FDI regulations and highway privatization.
The fund has refreshed its C-suite as it strides forward with its aggressive private markets strategy. Last year, KIC made new appointments at the top of the organization by promoting from within, marking a trend that has shifted from the past strategy of seeking external candidates. The sovereign wealth fund sought a CIO that could approach a turbulent economic environment from the organization’s viewpoint, and building on past well-honed experience of managing its portfolios.
Last August, KIC promoted head of investment strategy Lee Hoon to the position of Chief Investment Officer for a three-year term, with the option of a one-year extension. At the same time, Jung Ho-seok was appointed chief risk officer (CRO), but unlike Lee he was not an internal hire but brought into KIC from the Bank of Korea, where he led the planning and coordination department. Jung worked at the central bank for 32 years and previously headed the reserve management planning team.
