Korean national pension fund’s alternative investment nears $200 bn

National Pension Service (NPS) headquarters in Jeonju, North Jeolla Province. [Courtesy of NPS]

South Korea’s National Pension Service (NPS) has seen a remarkable surge in committed alternative investments, surpassing 250 trillion won ($192.4 billion) within a year. These alternative investments are crucial assets for the pension fund to bolster returns in the mid to long term, but the rapid growth of these assets has raised concerns about the fund’s capacity for effective management.

According to the NPS Investment Management on Wednesday, the fund’s commitments to alternative investments totaled 254.32 trillion won as of the end of last year, up more than 50 trillion won from 204.43 trillion won a year ago. Notably, this is the second consecutive year in which new alternative investment commitments have exceeded 50 trillion won, following a 50.3 trillion won increase in 2021.

Diversifying its portfolio, the NPS is expanding its investments in real estate, infrastructure, and private equity funds (PEFs). Among these, PEFs, including hedge funds, took the lead, accounting for the largest portion of the alternative investment commitments at the close of last year.

PEF commitments amounted to 114.78 trillion won, up nearly 30 percent from 89.30 trillion won in the previous year, followed by real estate at 78.75 trillion and infrastructure at 59.17 trillion won. Multi-asset investments amounted to 1.62 trillion won. Of the total investment commitments made last year, 63 percent, or about 161 trillion won, were actually executed.

Real estate investments in America were the largest at 13 trillion won at the end of last year, followed by those in Europe at 8 trillion won and Asia at 7 trillion won.

Of PEFs, investments in buyout funds aimed at acquiring management control took up the largest amount, followed by those in secondary, mezzanine, and corporate partnership funds.

A corporate partnership fund, also known as a COPA fund, is a joint investment fund that participates as a financial investor (FI) to offer funds to a domestic company which seeks mergers and acquisitions overseas or investments in an overseas company.

Meanwhile, private debt investments, which deliver relatively stable returns with low volatility amid high interest rates, reached 4.35 trillion won.

The NPS is significantly increasing the size of its committed alternative investments as they provide higher returns than traditional investment assets such as stocks and bonds. Last year, alternative investments were the only asset that delivered 8.9 percent yield, acting as a protective asset in the down market, when the fund posted the worst return of minus 8 percent.

While the size of the pension fund’s alternative investment commitments is growing rapidly each year, there are still not enough personnel to manage them.

In the field of alternative investments, expertise is key to deal sourcing as it is based on non-public information, but the human infrastructure has not kept pace with asset growth.

According to the office of Rep. Choi Young-hee, a member of the People Power Party and the National Assembly’s Health and Welfare Committee, alternative investments per national pension fund manager reached 1.25 trillion won at the end of May.

It is three times the level of the Canada Pension Plan Investment Board (CPPIB) and in contrast with many pension funds in developed countries where less than 1 trillion won in assets is managed per manager.

There are also concerns that new commitments have exceeded the level that the NPS can handle. “We also see that committed investments must not exceed 40 trillion won per year,” said a key official at the NPS. “Asset diversification is needed, but an overload from rapidly increasing commitments must be addressed first.”

Alternative investments of the NPS have already surpassed domestic equity investments in size. Since 2002, the fund has grown alternative investments to 155.2 trillion won, or 15.9 percent of the entire investments, at the end of May this year in nearly 20 years. The amount is 10 trillion won greater than the balance of domestic equity investments at 144.9 trillion won, or 14.9 percent of the entire investments. In fact, the amount of alternative investments has already topped the target share of 13.8 percent for the end of this year, which means current holdings of alternative assets may have to be sold before the end of the year.