NPS commits record W1.5tr for alternative investments

South Korea's National Pension Service will pour a record 1.5 trillion won ($1.1 billion) in alternative assets managed by external managers this year, the largest such allocation in the fund's history.

The majority of the sum, 1 trillion won, will go to private equity funds, according to a recent announcement by the NPS, marking a 25 percent increase from the previous year.

In 2023, the NPS allocated 800 billion won to private equity, with Macquarie Asset Management, IMM Private Equity and Hahn & Co. serving as general partners. For this year, NPS plans to select up to four general partners, each operating between 100 billion won and 350 billion won in funds.

Another 200 billion won is earmarked for venture capital funds, representing a 50 billion won increase from last year, with the allocation spread across four general partners.

The state pension fund will also introduce credit and distressed funds into its external portfolio for the first time, with 350 billion won designated for this category. Up to three general partners will be selected to manage these funds, each overseeing up to 150 billion won.

Funds in this category must consist of at least 80 percent in financial instruments like loan receivables, convertible bonds, bonds with warrants, redeemable convertible preferred stock or exchangeable bonds, the announcement elaborated.

The NPS is not alone in its interest in credit and distressed assets, as market conditions have led to an accumulation of distressed assets, particularly following steep price declines in domestic project financing and overseas commercial real estate. The Korea Post, for instance, recently decided to invest 300 billion won in domestic non-performing loan funds.

In the private equity space, firms are also expanding into credit and distressed assets, with some companies, such as IMM Holdings, Glenwood PE and VIG Partners, even establishing separate entities for these investments. These firms are expected to compete for external managers for NPS' funds.

The NPS will accept proposals for private equity fund managers until May 16, with final selections to be made by July. The selection process for credit and distressed fund managers will commence in July, with results expected by September. Venture fund manager recruitment will occur between September and November.

The NPS is one of the three largest public pension funds in the world alongside Norway’s Norges Bank Investment Management and Japan’s Government Pension Investment Fund. It recently surpassed 1,000 trillion won in total assets, reaching 1,070 trillion won as of the end of February.

About 49 percent of the fund, or 523.6 trillion won, is managed by external partners, with 51.9 percent of that invested in stocks and 31.9 percent in alternative assets.

Last year, the NPS posted its highest-ever investment profit since inception in 1999, logging 127.7 billion won, or 13.9 percent, in annual yield.