[INTERVIEW] Army fund mulls investment in foreign venture capital

[THE INVESTOR] Korea’s Military Mutual Aid Association, one of the largest institutional investors in the country with 9.4 trillion won (US$8 billion) under management, is reviewing plans to invest in foreign venture capital to secure higher returns, the association’s investment chief said.

“We may open opportunities not only to private equities, but to venture capital next year when investing in overseas blind pool funds,” Lee Sang-ho, chief investment officer of the Military Mutual Aid Association, said in an interview with The Korea Herald, a sister newspaper of The Investor.

“This is because venture capital tends to make faster exits than private equities. Sometimes, they yield higher return than private equities because venture capital puts more focus on companies with large growth potential,” Lee said in his office located in southern Seoul.

Established in 1984, the MMAA’s investment pool, responsible for soldiers’ welfare benefits, grew to 9.4 trillion won in 2015 from 954.4 billion won in 1995.

The association pays 3.2 percent annual interest rates to its 166,532 members -- mostly military service personnel and associated civilian employees. This is why Lee said he seeks “absolute profits” out of investment. 

The association’s profitability was put in great danger last year, as the average return on investment fell to 1.5 percent in 2015 from 5.1 percent in 2014, due to losses in the real estate asset class.

Consequently, the MMAA is gradually diverting its investment from real estate to new investments in infrastructure and overseas markets to secure more profits, Lee said.

The current 44 percent real estate investment portfolio will be reduced to 40 percent by 2020, according to Lee.

“We will increase the proportion of overseas investment to over 30 percent next year from 23 percent in 2015. In overseas markets, we will mainly invest in private debts, private equities and tangible assets such as air carriers and real estate,” Lee said.

“As Korea has low interest rates and volatile stock markets, we’re in the phase of reducing local equities and bonds,” he said.

As for investment in global bonds, India is the only country among emerging markets that Lee considers investing in bonds of because it meets two conditions -- it is growing faster than Korea and it has enough foreign capital coming in, he noted.

The 56-year-old financial investment expert spent most of his career in the banking industry and joined the MMAA in 2014 as chief financial officer.

Lee said foreign asset managers’ interest in Korean institutional investors has notably increased recently, with their requests for meetings getting more frequent.

More contacts with foreign asset managers led the MMAA to decide in early May to invest 50 billion won in a global infrastructure fund managed by Canada-based Brookfield Asset Management.

The MMAA also plans to aggressively seek buyout opportunities in the local IT sector, and has set up an M&A team under the investment strategy division, Lee revealed.

“We’re thinking about a 50-100 billion won deal as a first step,” he said.

“We’re looking at two things. First, the firm has to show strong growth potential and second, its business should be stable to make meaningful cash flow.”

The MMAA directly manages a private military company for maintenance of the military information system, operation of online malls for MMAA members and management of debit cards issued to Korean soldiers.

It also has five subsidiaries -- Korea Real Estate Investment Trust specializing in real estate development projects, Mplus Asset Management, lease financing firm Hankook Capital, defense and civilian facility manager Kongwoo EnC and military food and clothing-maker Mplus F&C.

By Kim Yoon-mi (yoonmi@heraldcorp.com)