South Korea’s largest public pension fund has made changes in its alternative investment program, removing all sub-categories of fund strategies in a move that would allow external managers to have greater discretion on their proposals.
The National Pension Service (NPS) announced last Friday that it would select external managers to allocate total 1.95 trillion won this year to alternative assets in the domestic market. It plans to commit a combined 950 billion won to private equity and venture capital funds which will be chosen through competition in a specified period, while allocating the remaining one trillion won to Corporate Partnership funds, for which applications will be evaluated whenever they are received.
The investment program has been greatly simplified compared to last year when there were four sub-categories – mid-cap PE funds, general VC funds, small to mid-sized VC funds and special situation and distressed funds – under PE and VC strategies.
This year, however, the pension fund has removed all sub-categories, allowing applying firms to decide strategies of funds as well as the size of them within a range of 80 billion to 200 billion won. The move is seen to give external managers greater autonomy in preparing their proposals.
But this will likely cause managers to come under more pressure to prove their worth. In the past years, some firms have applied for categories with lower competition at the last minute, hoping to improve their chance of winning the mandate. With changes made this year, such tricks are not possible anymore.
This means that managers now can depend on nothing but their own ability. That is, firms of a smaller size but with strong track records could have a greater chance of winning the mandate than bigger-sized rivals with relatively weak track records compared to their reputation.
The pension also said that it would not allow managers to form a consortium to serve co-general partners, which has been a common practice among firms that apply for alternative investment programs organized by domestic institutions.
But this practice has blurred accountability, often resulting in disputes surrounding the performance of funds managed by two general partners. The NPS seems to avoid problems associated with such occasions in the first place by evaluating individual firms.
“It has been more than 15 years since South Korean private equity markets began to grow, and institutions including the NPS have become more selective about external managers,” a private equity manager said. “The NPS has seemingly made it clear that it would evaluate firms solely based on their ability, which will likely put more pressure on them.”
(By reporter Han Hee-yeon)