Institutional investors join forces to create loan fund

A loan fund which the Korea Teachers Credit Union (KTCU) and Public Officials Benefit Association (POBA) will launch distinguishes itself from existing funds with its structure and a wider range of deal sourcing channels. More importantly, the fund’s capital will be solely drawn from limited partners – excluding five major financial holdings firms.

A loan fund was first launched in the domestic market in 2014. Shinhan Financial Group launched its loan fund in 2014 and Hana, KB Kookmin Bank, Woori and Nonghyup Bank followed suit.

Loan funds are attractive as they offer stable returns of between 5% and 6% amid a prolonged low-interest rate environment. The domestic acquisition financing market is growing rapidly along with increasing domestic  mergers and acquisition (M&A) activities. The domestic acquisition financing market is growing at a compound annual growth rate of 17% and is estimated at 22 trillion won ($18.4 billion) as of the end of 2019.

The domestic acquisition financing market is still dominated by senior loans provided by financial holdings firms whereas loan funds created by institutional investors like pension funds and insurance companies are a main source of acquisition finance in the U.S. and Europe.

KTCU is the first domestic institutional investor that entered the loan fund market. It launched the first senior loan fund jointly with Hana Alternative Asset Management at the end of 2014, the first among domestic pension funds and mutual aid associations. KTCU has invested 1.8 trillion won in three senior loan funds and it is estimated to have realized a profit of 160 billion won.

Institutional investors’ launch of loan funds is meaningful in that mutual aids and insurers have seized investment opportunities in the domestic acquisition financing market dominated by banks and bank-affiliated brokerage firms.

KTCU’s and POBA’s loan fund has secured a wide range of deal sourcing channels, unlike a loan fund launched by financial holdings firms which has to be used first for acquisition financing deals arranged by their affiliates.

The fund is also attractive as it has diversified its structure into three tranches – senior, mezzanine and co-investment funds. This is in line with the growth of the domestic refinancing and mezzanine financing market. (Reporting by Hye-ran Kim)