South Korea’s National Health Insurance Service (NHIS) announced a plan to select external managers to lead its alternative investment, raising hopes for a broader pool of limited partners in the country’s alternative investment space.
The state health insurance scheme will receive applications for the selection of two external managers that will lead its investment in alternative assets by April 14. The selected managers will each receive up to 700 billion won from the scheme to invest in other underlying funds focused on alternative assets such as real estate, infrastructure and private equity.
The move came after the NHIS’ investment management committee amended the investment guidelines in July last year to allow the scheme to allocate money to alternatives in search of higher returns. The NHIS so far has invested most of its assets in safer instruments such as bonds and deposits. But prolonged low interest rates exacerbated the deficit of the scheme, forcing it to take a more aggressive investing approach.
With this change, the nation’s four social insurance schemes – the National Pension Service (NPS), the NHIS, the Employment Insurance and Workers’ Compensation Insurance – have all come to include alternative assets in their portfolios. Moreover, the decision to invest in alternatives by the NHIS, which is known for maintaining the most conservative investing approach among the four, will likely have an effect on other domestic institutional investors.
The pool of limited partners in the Korean alternative investment space is currently dominated by the NPS, the nation’s biggest public pension fund, and state policy bank Korea Development Bank (KDB), both of which frequently act as an anchor investor in funds launched by domestic alternative managers. Such a limited pool of institutions investing in alternative assets has often negatively affected fundraising activity.
There were voices calling for the need to attract more institutional investors to the alternative investment industry, but little progress has been made for the past years. The shift in the NHIS’ approach to the alternative investment, however, is raising hopes that more institutions could follow suit.
Higher returns possibly generated by the NHIS’ investment in alternative assets in the coming years could lead to a change in domestic institutions’ perception of alternative investments, especially among endowments and foundations. Domestic endowments, which are estimated to manage nine to ten trillion won in assets in total, have continued to be tapped by PE firms which seek to attract investments from them.
“Domestic endowments and foundations, like the NHIS, have maintained a conservative investing approach, allocating most of their assets to bonds and deposits,” an industry insider said. “But this could change if the NHIS’ investment in alternatives results in higher returns in the future.”
(By reporter Choi Ik-hwan)